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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, 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 November 5, 2003 was 14,952,926.
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1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KONTRON MOBILE COMPUTING, INC.
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................................. $ 1,405,270 $ 2,031,285
Accounts receivable, net of allowance for doubtful accounts of $194,600 and $127,200 ... 2,034,794 3,015,258
Accounts receivable, related parties ................................................... 105,681 119,919
Inventories ............................................................................ 1,569,981 975,263
Prepaid expenses and other ............................................................. 143,511 54,269
------------ ------------
Total current assets .................................................... 5,259,237 6,195,994
------------ ------------
Property and Equipment:
Computers and equipment ............................................................ 1,172,007 1,163,624
Furniture and fixtures ............................................................. 800,706 800,706
Leasehold improvements ............................................................. 346,099 346,099
Less: Accumulated depreciation and amortization .................................... (2,205,740) (2,129,623)
------------ ------------
Property and equipment, net ................................................... 113,072 180,806
Deposits and Other Assets, net ......................................................... 6,557 39,398
------------ ------------
TOTAL ASSETS ........................................................................... $ 5,378,866 $ 6,416,198
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ....................................................................... $ 299,865 $ 401,845
Accounts payable, related parties ...................................................... 1,161,812 412,425
Accrued warranty ....................................................................... 243,000 332,169
Accrued compensation and benefits ...................................................... 121,594 272,312
Other accrued liabilities .............................................................. 353,108 340,174
Deferred revenue, short-term ........................................................... 591,860 797,658
------------ ------------
Total current liabilities ..................................................... 2,771,239 2,556,583
------------ ------------
LONG TERM LIABILITIES:
Notes payable to Kontron AG ............................................................ 6,536,190 7,462,071
Deferred revenue, long-term ............................................................ 132,989 266,634
------------ ------------
Total long term liabilities ................................................... 6,669,179 7,728,705
------------ ------------
Total Liabilities ...................................................................... 9,440,418 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 .................................................................... (36,633,227) (36,440,765)
------------ ------------
Total shareholders' equity (deficit) .................................... (4,061,552) (3,869,090)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ................................... $ 5,378,866 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
2003 2002 2003 2002
----- ----- ----- ----
Net Sales ......................................... $ 3,223,414 $ 2,357,025 $ 8,213,796 $ 7,858,085
Cost of Sales ..................................... 2,024,616 1,421,803 4,724,833 4,502,196
----------- ----------- ----------- -----------
Gross profit ............................... 1,198,798 935,222 3,488,963 3,355,889
----------- ----------- ----------- -----------
Operating Expenses:
Sales and marketing ........................ 456,565 613,344 1,415,845 1,686,800
General and administrative ................. 342,300 402,723 973,451 856,690
Research and development ................... 235,842 275,944 792,335 752,478
----------- ----------- ----------- -----------
Total operating expenses ............ 1,034,707 1,292,011 3,181,631 3,295,968
----------- ----------- ----------- -----------
Operating income (loss) ............. 164,091 (356,789) 307,332 59,921
Loss on foreign currency .......................... (16,721) (19,523) (96,050) (124,702)
Interest expense, net ............................. (126,104) (171,136) (403,744) (520,206)
----------- ----------- ----------- -----------
Net income (loss) applicable to common shareholders $ 21,266 $ (547,448) $ (192,462) $ (584,987)
=========== =========== =========== ===========
Basic and Diluted Income (Loss) Per Common Share:
Net income (loss) per common share ................ $ -- $ (.04) $ (.01) $ (.04)
----------- ----------- ----------- -----------
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 NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
2003 2002
---- ----
OPERATING ACTIVITIES:
Net loss ............................................................ $ (192,462) $ (584,987)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities --
Depreciation and amortization ................................ 76,117 179,365
Provision for losses on accounts receivable .................. 67,393 (130,204)
Loss on foreign currency ..................................... 96,050 124,702
Changes in operating items:
Accounts receivable ................................... 927,309 1,637,984
Inventories ........................................... (594,718) (121,036)
Prepaid expenses and other ............................ (56,401) 249,642
Accounts payable ...................................... 647,407 (979,209)
Accrued expenses ...................................... (251,331) (815,025)
Deferred revenue ...................................... (339,443) (223,959)
---------- ----------
Net cash provided by (used for) operating activities ......... 379,921 (662,727)
---------- ----------
INVESTING ACTIVITIES:
Purchase of property and equipment ........................... (8,383) (33,818)
---------- ----------
FINANCING ACTIVITIES:
Repayments of notes to Kontron AG ............................ 1,655,349) (410,108)
Net proceeds from forward contracts .......................... 657,796 408,123
---------- ----------
Net cash used for financing activities ....................... (997,553) (1,985)
---------- ----------
CHANGE IN CASH AND CASH EQUIVALENTS ................................. (626,015) (698,530)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...................... 2,031,285 2,073,970
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................ $1,405,270 $1,375,440
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest .............................................. $ 344,651 $ 546,191
========== ==========
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:
SEPTEMBER 30, DECEMBER 31,
2003 2002
---------- ----------
Raw materials ..................... $1,078,038 $626,560
Work in process ................... 172,859 59,962
Finished goods .................... 319,084 288,741
---------- --------
Total ...................... $1,569,981 $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 ($9.7
million based on September 30, 2003 exchange rate.) As September 30, 2003,
borrowings under this agreement bear interest at 8% per annum (payable monthly).
Outstanding borrowings under this line of credit were approximately $6.5 million
at September 30, 2003. In the first nine months 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," as amended by SFAS No. 149 "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," and also marks
the related debt instrument to market under SFAS No. 52, "Foreign Currency
Translation." For the quarter ended September 30, 2003, the Company recorded a
loss of $16,721. As of September 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.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is applicable for contracts entered into
or modified after June 30, 2003. The implementation of this statement does not
have a significant impact on the financial statements.
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 September 30, 2003:
Adjustments to Warranty
Warranty Amounts Charged Reserve Amounts Related to
Beginning Balance Claims Paid to Expense Prior Year Ending Balance
----------------- ----------- ---------- ---------- --------------
$283,000 $(24,243) $24,243 $(40,000) $243,000
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:
6
Three months ended Nine months ended
September 30, September 30,
------------------------ -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss), as reported ................. $ 21,266 $(547,448) $(192,462) $(584,987)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards ...................... (70,457) -- (468,381) (51,213)
-------- --------- --------- ---------
Pro forma net income (loss) ................... $(49,191) $(547,448) $(660,843) $(636,200)
======== ========= ========= =========
Net income (loss) per share:
Basic and diluted - as reported ........ $ -- $ (.04) $ (.01) $ (.04)
Basic and diluted - pro forma .......... -- (.04) (.04) (.04)
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 FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales ............................................. 100 % 100 % 100 % 100 %
Cost of sales ......................................... 63 60 58 57
--- --- --- ---
Gross profit ................................... 37 40 42 43
Operating expenses:
Sales and marketing ............................ 14 26 17 21
General and administrative ..................... 11 17 12 11
7
Research and development ....................... 7 12 9 10
--- --- --- ---
Total operating expenses ................ 32 55 38 42
--- --- --- ---
Operating income (loss) ............................... 5 (15) 4 1
Loss on currency conversion ........................... -- (1) (1) (2)
Interest expense, net ................................. (4) (7) (5) (7)
--- --- --- ---
Net income (loss) applicable to common shareholders ... 1% (23)% (2)% (8)%
=== === === ===
Net Sales. The Company's net sales increased $0.8 million, or 37%, to
$3.2 million in the third quarter of 2003 from $2.4 million in the third quarter
of 2002 and increased 5% to $8.2 million in the first nine months of 2003 from
$7.9 million in the first nine months of 2002. The increase in third quarter
2003 was due to the shipments of two large orders, compared to one large
shipment in third quarter 2002.
The Company continues to target key vertical markets including
government, military, public services, utilities and other field service
organizations. Two customers, Visteon Corporation and Jackson County, Michigan,
Sheriff's Department, accounted for 22% and 11%, respectively, of net sales in
the third quarter of 2003, representing $0.7 million and $0.4 million,
respectively, of the Company's net sales. In the third quarter of 2002, sales to
Siemens Integrated represented 15%, or $0.4 million, of the Company's net sales.
International sales increased to $0.4 million, or 12% of net sales, for
the third quarter of 2003 from $40,000, or 2% of net sales, for the comparable
period in 2002. 63% of the international sales in the third quarter of 2003 were
in the Americas 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 remainder of 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 $1.2 million, or 37% of net
sales, for the third quarter of 2003 from $0.9 million, or 40% of net sales for
the third quarter of 2002. Gross margin increased to $3.5 million for the first
nine months of year 2003 from $3.4 million for the first nine months of 2002.
The gross margin percent decreased to 42% from 43% for the nine month periods
ended 2003 and 2002, respectively. The increased gross margin dollars for third
quarter 2003 is due to increased revenue, while the decreased gross margin
percent is due to increased sales of a lower margin product. 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 decreased to $0.5 million for the third quarter of 2003 from $0.6
million for the third quarter of 2002. This is due to an adjustment to the
warranty reserve, in addition to reduced advertising costs due to timing. As a
percentage of net sales, sales and marketing expenses decreased to 14% for the
third quarter of 2003 from 26% for the third quarter of 2002 due to higher
revenue over which to allocate the costs. In the first nine months of 2003,
sales and marketing expenses were $1.4 million and 17% of net sales as compared
to $1.7 million and 21% of net sales in the first nine months of 2002.
General and Administrative. General and administrative expenses include
the Company's executive, finance, information services and human resources
departments. These expenses decreased to $0.3 million for the quarter ended
September 30, 2003, from $0.4 million for the quarter ended September 30, 2002.
As a percentage of net sales, general and administrative expenses decreased to
11% for the quarter ended September 30, 2003, from 17% for the quarter ended
September 30, 2002. General and administrative expenses were $1.0 million, or
12% of net sales for the first nine months of 2003 as compared to $0.9 million,
or 11% of net sales for the comparable period in 2002.
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
8
as incurred. Research and development expenses decreased to $0.2 million for
the third quarter of 2003 from $0.3 million for the third quarter of 2002. As
a percentage of net sales, research and development costs were 7% and 12% for
the third quarter of 2003 and 2002, respectively. Research and development
expenses remained consistent at $0.8 million for the first nine months of 2003
and 2002. As a percentage of net sales, research and development expenses
decreased to 9% for the first nine months of 2003 from 10% for the first nine
months of 2002. The reduced expenses for third quarter 2003 are due to
allocating applicable engineering costs to cost of goods sold and offsetting
them in gross margin for a current development project. The reduced percent is
due to lower costs, in addition to higher 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 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 September 30, 2003, the Company
recorded a loss on currency conversion of $16,721. As of September 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 $126,100
for the third quarter of 2003 compared to net interest expense of $171,100 for
the comparable period in 2002. Net interest expense for the first nine months of
2003 was $403,700 compared to net interest expense of $520,200 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 nine months 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 September 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 ($9.7 million based on
September 30, 2003 exchange rate.) As of September 30, 2003, borrowings under
this agreement bear interest at 8% per annum (payable monthly). Outstanding
borrowings under this line of credit were approximately $6.5 million at
September 30, 2003.
9
After re-paying $2.0 million to Kontron in the first quarter, the
Company's cash balance has stayed consistent at $1.3 to $1.4 million at the end
of each of the quarters in 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 September 30, 2003.
Cash provided by operating activities was $379,921 for the first nine
months of 2003, compared to cash used for operating activities of $662,727 in
the comparable period in 2002. Gross accounts receivable decreased to $2.3
million at September 30, 2003 from $3.3 million at December 31, 2002 due to
collections and lower revenue levels compared to fourth quarter 2002.
Inventories increased to $1.6 million at September 30, 2003 from $1.0 million at
December 31, 2002 due to increased stock of new products. Accounts payable
increased to $1.5 million at September 30, 2003 from $0.8 million at December
31, 2002 due to increased purchases for third quarter shipments and anticipated
fourth quarter shipments.
Cash used for investing activities was $8,383 relating to purchases of
property and equipment. Cash used for financing activities was $997,553 relating
to a partial repayment of the notes to Kontron of $1,655,349, offset by net
proceeds from forward contracts of $657,796.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2003 the Company had $6.5 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 September 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 $1.4
million in cash and cash equivalents at September 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 third 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.
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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
None.
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 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 July 14, 2003 reporting under Item 4
("Changes in Registrant's Certifying Accountants") and Item 7 ("Financial
Statements and Exhibits"), announcing the dismissal of Deloitte & Touche LLP as
the Company's independent auditors and the engagement of Boulay, Heutmaker,
Zibell & Co. P.L.L.P. to serve as the Company's independent auditors for the
year ending December 31, 2003.
The Company filed an 8-K dated August 14, 2003 reporting under Item
7 ("Financial Statements and Exhibits") and Item 12 ("Results of Operations and
Financial Condition"), a press release announcing the Company's financial
results for the second quarter ended June 30, 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: November 14, 2003
/s/ Thomas Sparrvik
----------------------------------------
Thomas Sparrvik, Chief Executive Officer
(principal executive officer)
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