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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 March 31, 2004
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 (I.R.S. Employer
incorporation 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 May 3, 2004 was 14,952,926.
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KONTRON MOBILE COMPUTING, INC.
BALANCE SHEETS
MARCH 31, DECEMBER 31,
2004 2003
(UNAUDITED) ----
-----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................................... $ 1,176,812 $ 1,694,302
Accounts receivable, net of allowance for doubtful accounts of $157,700 and $158,200.......... 1,382,031 2,562,900
Accounts receivable, related parties.......................................................... 111,440 185,046
Inventories................................................................................... 2,295,930 1,678,254
Prepaid expenses and other.................................................................... 163,349 50,602
----------- -----------
Total current assets............................................................... 5,129,562 6,171,104
----------- -----------
Property and Equipment:
Computers and equipment.................................................................... 979,601 1,172,007
Furniture and fixtures..................................................................... 797,746 800,706
Leasehold improvements..................................................................... 346,099 346,099
Less: Accumulated depreciation and amortization............................................ (2,045,570) (2,226,309)
----------- -----------
Property and equipment, net............................................................ 77,876 92,503
Deposits and Other Assets, net................................................................ 3,216 6,556
----------- -----------
TOTAL ASSETS.................................................................................. $ 5,210,654 $ 6,270,163
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.............................................................................. $ 225,626 $ 144,527
Accounts payable, related parties............................................................. 941,443 959,627
Accrued warranty ............................................................................. 140,000 203,000
Accrued compensation and benefits............................................................. 79,642 255,154
Accrued interest to Kontron AG................................................................ 577,436 450,575
Other accrued liabilities..................................................................... 70,448 148,684
Deferred revenue, short-term.................................................................. 395,173 537,372
----------- -----------
Total current liabilities.............................................................. 2,429,768 2,698,939
----------- -----------
LONG TERM LIABILITIES:
Notes payable to Kontron AG................................................................... 6,921,510 7,103,910
Deferred revenue, long-term................................................................... 200,775 159,158
----------- -----------
Total long term liabilities............................................................ 7,122,285 7,263,068
----------- -----------
Total Liabilities............................................................................. 9,552,053 9,962,007
----------- -----------
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........................................................................... (36,913,074) (36,263,519)
----------- -----------
Total shareholders' equity (deficit)............................................... (4,341,399) (3,691,844)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT).......................................... $ 5,210,654 $ 6,270,163
=========== ===========
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
MARCH 31,
--------------------------
2004 2003
----- ----
Net Sales ................................................. $ 2,146,215 $ 2,126,710
Cost of Sales.............................................. 1,419,631 1,202,676
----------- -----------
Gross profit ......................................... 726,584 924,034
----------- -----------
Operating Expenses:
Sales and marketing................................... 426,486 441,909
General and administrative............................ 315,331 280,322
Research and development.............................. 393,393 290,837
----------- -----------
Total operating expenses......................... 1,135,210 1,013,068
----------- -----------
Operating loss.................................. (408,626) (89,034)
Loss on foreign currency .................................. (7,703) (54,005)
Interest expense, net...................................... (137,202) (157,964)
Professional fees related to Kontron AG offer.............. (96,024) --
----------- -----------
Net loss applicable to common shareholders................. $ (649,555) $ (301,003)
=========== ===========
Basic and Diluted Loss Per Common Share:
Net loss per common share.................................. $ (.04) $ (.02)
----------- -----------
Basic and diluted weighted average
common shares outstanding.................................. 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 THREE MONTHS
ENDED MARCH 31,
--------------------
2004 2003
---- ----
OPERATING ACTIVITIES:
Net loss .................................................................... $ (649,555) $ (301,003)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities--
Depreciation and amortization........................................... 20,081 35,043
Provision for losses on accounts receivable............................. -- (6,308)
Provision for accrued warranty ......................................... (63,000) (49,169)
Loss on foreign currency................................................ 7,703 54,005
Changes in operating items:
Accounts receivable................................................ 1,254,475 2,192,684
Inventories........................................................ (617,676) (381,673)
Prepaid expenses and other......................................... (109,407) (54,596)
Accounts payable................................................... 62,915 (192,339)
Accrued expenses................................................... (111,670) (457,571)
Deferred revenue................................................... (100,582) (162,495)
---------- ----------
Net cash provided by (used for) operating activities.................... (306,716) 676,578
---------- ----------
INVESTING ACTIVITIES:
Purchase of property and equipment...................................... (5,454) --
---------- ----------
FINANCING ACTIVITIES:
Repayments of notes to Kontron AG....................................... -- (1,655,349)
Net (payments on) proceeds from forward contracts....................... (205,320) 293,186
---------- ----------
Net cash used for financing activities.................................. (205,320) (1,362,163)
---------- ----------
CHANGE IN CASH AND CASH EQUIVALENTS.......................................... (517,490) (685,585)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................... 1,694,302 2,031,285
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................................... $1,176,812 $1,345,700
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest....................................................... $ -- $ 344,651
========== ==========
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, 2003. 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.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the financial statements. Estimates also affect the reported amounts of
revenues and expenses during the periods presented. Estimates are used for such
items as allowances for doubtful accounts, inventory write-downs, useful lives
of property and equipment, warranty costs and income tax valuation allowances.
Ultimate results could differ from those estimates. Significant estimates
included in the financial statements are allowances for doubtful accounts,
inventory write-downs and warranty costs. It is reasonably possible that these
significant estimates may change in the near future and the effect may be
material to the financial statements.
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:
MARCH 31, DECEMBER 31,
2004 2003
---- ----
Raw materials....................................................... $ 1,773,727 $ 1,224,853
Work in process..................................................... 352,783 294,884
Finished goods...................................................... 169,420 158,517
----------- -----------
Total.......................................................... $ 2,295,930 $ 1,678,254
=========== ===========
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, 2004, if necessary.
As of December 31, 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 ($10.3 million based on
March 31, 2004 exchange rate.) Borrowings under this agreement bear interest at
8% per annum (payable monthly). The maturity date of the note is July 1, 2011.
Outstanding borrowings under this line of credit were approximately $6.9 million
at March 31, 2004.
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 end of each quarter and
settle the contract at the end of the subsequent quarter. The Company records
gains and losses on these derivative contracts (which are not designated as
hedging
5
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." For the quarter ended March 31, 2004, the
Company recorded a net loss on currency conversion of $7,703. As of March 31,
2004, 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. 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. FIN 45 also requires expanded disclosure of information related to
product warranty amounts recorded in the financial statements. The Company
adopted the provision effective for the quarter ended March 31, 2003. The
implementation of this interpretation 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 March 31, 2004 and 2003:
Aggregate Changes in the Aggregate Changes in
Aggregate Reductions Liability for Accruals the Liability for
in the Liability for Related to Product Accruals Related to
Period Beginning Payments Made Under Warranties Issued During Pre-Existing Ending
Ending Balance the Warranties the Reporting Periods Warranties Balance
------ ------- -------------- --------------------- ---------- -------
March 31, 2004 $203,000 $(34,944) $16,844 $(44,900) $140,000
March 31, 2003 $332,169 $(64,064) $14,895 -- $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
6
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 March 31,
----------------------------
2004 2003
---- ----
Net loss, as reported..................................... $ (649,555) $ (301,003)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards................................. (438) (581)
---------- ----------
Pro forma net income (loss).............................. $ (649,993) $ (301,584)
========== ==========
Net loss per share:
Basic and diluted -- as reported.................... $ (.04) $ (.02)
Basic and diluted -- pro forma...................... (.04) (.02)
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.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. Some of the provisions of this Statement
are consistent with the current definition of liabilities in FASB Concepts
Statement No. 6, Elements of Financial Statements. The remaining provisions of
this Statement are consistent with the Board's proposal to revise that
definition to encompass certain obligations that a reporting entity can or must
settle by issuing its own equity shares, depending on the nature of the
relationship established between the holder and the issuer. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The implementation of this statement does not
have a significant impact on the financial statements.
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
7
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, the long
customer sales cycle and expenses that may continue to be incurred in connection
with the pending offer by Kontron AG to acquire the shares of the Company's
common stock held by minority shareholders. 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 in
the Form 10-K filed for the year ended December 31, 2003.
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
MARCH 31,
--------------------------
2004 2003
---- ----
Net sales .......................................................... 100% 100%
Cost of sales....................................................... 66 57
--- ---
Gross profit................................................... 34 43
Operating expenses:
Sales and marketing............................................ 20 21
General and administrative..................................... 15 13
Research and development....................................... 18 14
--- ---
Total operating expenses.................................. 53 48
--- ---
Operating loss...................................................... (19) (5)
Loss on currency conversion......................................... (1) (2)
Interest expense, net............................................... (6) (7)
Other expense....................................................... (4) --
--- ---
Net loss applicable to common shareholders.......................... (30)% (14)%
=== ===
Net Sales. The Company's net sales stayed consistent at $2.1 million for
the first quarters of 2004 and 2003.
The Company continues to target key vertical markets including government,
military, public services, utilities and other field service organizations. Two
customers, Visteon Corporation and U.S. Army (DFAS-RO) accounted for 17% and
12%, respectively, of net sales in the first quarter of 2004, representing $0.4
million and $0.3 million, respectively, of the Company's net sales. In the first
quarter of 2003, sales to Kontron, for further resale outside North America,
accounted for 13%, or $0.3 million, of the Company's net sales.
International sales decreased to $0.2 million, or 9% of net sales, for the
first quarter of 2004 from $0.4 million, or 20% of net sales, for the comparable
period in 2003. 55% and 64% of the international sales in the first quarters of
2004 and 2003, respectively, were in Europe. The Company believes that
international sales as a percentage of net sales for the remainder of 2004 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 decreased to $0.7 million, or 34% of net sales,
for the first quarter of 2004 from $0.9 million, or 43% of net sales for the
first quarter of 2003. The decreased gross margin as a percentage of net sales
is due to increased sales of a lower margin product in the first quarter of
2004. 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.
8
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 stayed consistent at $0.4 million for the first quarter of 2004 and
2003. As a percentage of net sales, sales and marketing expenses decreased
slightly to 20% for the first quarter of 2004 from 21% for the first quarter of
2003.
General and Administrative. General and administrative expenses include the
Company's executive, finance, information services and human resources
departments. General and administrative expenses stayed consistent at $0.3
million for the first quarter of 2004 and 2003. As a percentage of net sales,
general and administrative expenses increased to 15% for the quarter ended March
31, 2004, from 13% for the quarter ended March 31, 2003. This increase is due to
a timing difference relating to professional fees, offset by a credit adjustment
for common area maintenance in the first quarter of 2003 with no comparable
adjustment in the first quarter of 2004.
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 increased to $0.4 million for the
first quarter of 2004 from $0.3 million for the first quarter of 2003. As a
percentage of net sales, research and development costs were 18% and 14% for the
first quarter of 2004 and 2003, respectively. The increased expenses are due to
higher product development costs for potential new products.
Loss on Currency Conversion. The Company's line of credit agreement 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 end of each quarter and settle the contract at the end of the
subsequent 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." For the quarter ended March 31, 2004, the Company recorded a net
loss on currency conversion of $7,703 compared to a net loss of $54,005 in the
first quarter 2003. As of March 31, 2004, 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 $137,200 for
the first quarter of 2004 compared to net interest expense of approximately
$158,000 for the comparable period in 2003. 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.
Professional Fees Related to Kontron AG Offer. In response to the offer by
Kontron AG to acquire the shares of the Company's Common Stock from minority
shareholders that Kontron AG does not already own, the Company has incurred
approximately $96,000 in other expense for legal, financial and accounting
advisers related to evaluating and assessing Kontron AG's offer.
LIQUIDITY AND CAPITAL RESOURCES
In 2004, 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 2003, the Company introduced enhancements to
existing product lines: an enhanced EnVoy with a Kontron-designed faster CPU
module, the FW8500 with enhanced features and performance based on another
Kontron-designed CPU module, and a new 12.1" high-bright display option for
EnVoy. The ReVolution began shipping in early 2003 and went into full production
in early fall 2003. The ReVolution offers the Company new market opportunities
that the existing, mature products do not have the features to achieve.
Additional new products are planned to replace older products and allow for
growth
9
through 2004. The Company continues to be focused on further cost reductions
through on-going product re-design initiatives by Kontron worldwide mobile
design teams.
As in 2003, the Company intends to continue funding its own cash needs in
2004 without assistance from Kontron. To be successful, the Company will focus
on increased sales and profitability, in addition to working capital management.
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, 2004, if necessary.
As of March, 31, 2004, 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 ($10.3 million based on March 31, 2004
exchange rate.) Borrowings under this agreement bear interest at 8% per annum
(payable monthly). The maturity date of the note is July 1, 2011. Outstanding
borrowings under this line of credit were approximately $6.9 million at March
31, 2004.
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. The Company is currently finalizing an arrangement with
the bank for a new agreement through May 2005. There were no borrowings
outstanding on this line of credit at March 31, 2004.
Cash used for operating activities was $0.3 million for the first three
months of 2004, compared to cash provided by operating activities of $0.7
million in the comparable period in 2003. Gross accounts receivable decreased to
$1.7 million at March 31, 2004 from $2.9 million at December 31, 2003 due to
collections. Inventories increased to $2.3 million at March 31, 2004 from $1.7
million at December 31, 2003 due to purchases of the ReVolution product to have
product available for shipping due to long lead times from the vendor. Accounts
payable increased to $1.2 million at March 31, 2004 from $1.1 million at
December 31, 2003.
Cash used for investing activities was $5,454 relating to purchases of
property and equipment during the first three months of 2004. Cash used for
financing activities was $205,320 relating to net payments on forward contracts
for the first three months of 2004. Cash provided by financing activities was
$293,186 relating to net proceeds from forward contracts for the first three
months of 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2004 the Company had $6.9 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 March 31, 2004, 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 $1.2 million in
cash and cash equivalents at March 31, 2004 compared to $1.7 million at March
31, 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
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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 first 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 not involved in any pending legal proceedings.
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 January 8, 2004 reporting under Item 5
("Other Events"), that the special committee of the Registrant's board of
directors hired Stonehill Group, LLP as its financial adviser. The special
committee has been formed to deal with the offer from Registrant's majority
shareholder, Kontron AG, to acquire all of the shares of Registrant's common
stock not currently owned or controlled by Kontron AG.
The Company filed an 8-K dated March 29, 2004 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 fourth quarter ended December 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: May 17, 2004
/s/ Thomas Sparrvik
-------------------------------------
Thomas Sparrvik, Chief Executive Officer
(principal executive officer)
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