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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the fiscal year ended December 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-22221
KONTRON MOBILE COMPUTING, INC.
Minnesota 41-1731723
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7631 Anagram Drive, 55344
Eden Prairie, Minnesota (Zip Code)
(Address of principal executive offices)
(952) 974-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- --------------------------------- --------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on March
5, 2002 as reported on the Over The Counter Bulletin Board, was approximately
$4,963,724. Shares of Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. The determination of affiliate
status for purposes of this paragraph is not necessarily a conclusive
determination for other purposes.
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding as of March 5, 2002 was 14,952,926.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2002 Annual Meeting of
Shareholders to be held May 21, 2002 are incorporated by reference in Part III.
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PART I
ITEM 1. Business
The Company. Kontron Mobile Computing, Inc. ("Kontron Mobile Computing" or
"the Company"), was incorporated in Minnesota in 1992 under its former name of
FieldWorks, Incorporated and is dedicated to the development and sale of rugged
portable computing solutions. The Company is part of the worldwide group of
Kontron companies, owned or principally owned by Kontron Embedded Computers AG
(Kontron). Over the past several years, the Company has evolved its strategy to
focus on designing and providing industry-specific field technology solutions.
The Company believes that this strategy represents the strongest opportunity for
growth and differentiation.
The Company has had a history of designing and delivering hardware
platforms for extreme environments and will continue to capitalize on its strong
product reputation and value added reseller network. The Company's focus will
continue to target military, public safety, automation and transportation
markets where users rely on the features of Kontron Mobile Computing computers
to do their jobs.
Kontron Mobile Computing computer platforms are designed for demanding
field environments, meeting military test standards for shock, vibration,
moisture and temperature extremes. Features include outdoor-readable
high-resolution color displays, sealed pointing devices and integrated
technology protected for use in extended temperatures and isolated for shock and
vibration. The Company also offers a high level of expandability and
upgradability within each product platform. Expansion paths include desktop-like
ISA/PCI computer card expansion slots, PC card slots, serial ports, universal
serial bus and custom modules. As a result, all platforms are flexible
"electronic toolboxes" that integrate the user's application-specific tools and
technologies into one custom, rugged mobile solution. Upgrade paths include
central processing units (CPU), random access memory (RAM), hard drive
capacities, display technologies and peripheral technologies, such as wireless
communication. Such upgradability contributes to a longer useful life which
reduces the total cost of ownership for the end-customer. It sets Kontron Mobile
Computing products and solutions higher on the value scale with our customers as
their initial investment is in many ways "protected" by technology enhancements
or improvements over a period of time.
The Rugged Computing Market. Technological advances have increased
customers' dependence on mobile computing and communications devices, such as
portable computers, pagers and cellular telephones, to enhance workforce
productivity. The rugged computing market has increasing needs for reliability,
operability in extreme conditions, portability, security and compatibility with
a variety of communication interfaces and standard desktop computer technology.
Organizations are increasingly seeking to connect field personnel through
computerization. Such computerization can provide sophisticated field diagnostic
and analytic capabilities, enhance field access to data and on-line information,
eliminate paperwork and improve communication.
The markets for the Company's products consist of those businesses and
other entities that are seeking effective mobile computing for field personnel
and functions. The Company's rugged mobile computing platforms are used in a
variety of industries whose demands vary widely, and include: (i) public service
for improved productivity, efficiency and real time, remote data access (ii)
military and government contractors for situational awareness, flight-line
communications and real time, highly reliable data acquisition in extreme
conditions and (iii) transportation OEMs and full-solution integrators for
wireless data transfer, maintenance and diagnostic testing.
Strategy. The Company's vision continues to be to become "the worldwide
rugged, mobile computing solutions provider." The Company's strategy consists of
the following key components:
Further Penetration of Key Vertical Markets. The Company continues to
target key vertical markets including government, military, public services, and
utilities. The Company develops product features and functions to address the
needs of a particular vertical market and provides application-engineering
services to support the specific requirements of those customers when necessary.
The Company's strategy is to be a key provider of tools and services to
facilitate field data acquisition, test and measurement, telemetry, and mobile
communication applications. Custom applications addressed by the Company are
typically characterized by the opportunity to sell a significant quantity of
units over a period of time based on a single application solution.
Continued Reduction in Product Costs and Time to Market. The Company has
taken advantage of its relationship with the other worldwide Kontron companies
by outsourcing the design and manufacturing of some of its products. This is
consistent with our strategy of maintaining rugged mobile design strength at the
architectural level, while utilizing intra-company resources to reduce costs and
add incremental expertise. This change has been well received by the Company's
customers and value-added resellers. Additionally, the Company continues to be
focused on further cost reductions through on-going product re-design
initiatives through Kontron worldwide mobile design teams.
2
Products. The Company's products are rugged mobile computers designed and
manufactured for field applications including data acquisition, mobile data
communications and test and measurement. Part of the Company's growth strategy
is to introduce new products that will further penetrate existing markets as
well as penetrate new and growing markets. In 2001, the Company introduced four
new products, the EnVoy, Power Lite, 2000 Series III and the Field Lite.
Additional new products will replace older products and allow for growth through
2002.
FieldWorks 8000 Series Platform: The FieldWorks 8000 Series is targeted at
the high end of the rugged field computing platform market and offers
significant expansion capability. Targeted at test and measurement, telemetry
and data acquisition applications, the FieldWorks 8000 Series is sold primarily
within field technology / military markets.
The structure of the rugged, portable, FieldWorks 8000 Series is based on a
high-strength cast magnesium alloy external housing. Internal components that
are sensitive to shock and vibration are contained within this housing and
isolated with special tuned shock absorbing polymers, while a shock absorbing
bushing system suspends all drives and the CPU. The FieldWorks 8000 Series
incorporates the Company's backplane/card cage design, which provides up to six
ISA/PCI expansion card slots within the housing permitting the integration of
instrumentation, data acquisition, test and measurement and communications
capabilities. Also contained within the housing is a PCMCIA expansion card
reader, integrated AC/DC power supply, uninterruptable power supply capability,
full-length desktop ISA/PCI expansion card slots, integrated CD-ROM and floppy
diskette drives, and several optional features such as dual removable hard
drives, Sun-Light Readable display and XGA display options. The FieldWorks 8000
Series is the Company's flagship product.
Power Lite: The Power Lite is similar to the FieldWorks 8000 Series, with
less rugged features and less expansion capability. The Power Lite is intended
for light industrial applications like manufacturing plant floors,
telecommunications test and in-plant data collection. The Power Lite offers a
single ISA/PCI expansion card capability with a 14.1" XGA display. It is ideally
suited for applications that display schematics and graphical information
databases.
EnVoy Mobile Data Server (MDS): The EnVoy is a three-piece onboard vehicle
computer system that includes a Server component, a high-bright Display and a
backlit Keyboard. The EnVoy can be customized by adding wireless technology,
Global Positioning (GPS) technology, data radios and other devices through two
embedded PC card slots, USB ports and three open serial ports. The floppy and
CD-ROM devices can be connected to the Server by cables that can then be mounted
in a remote location such as the vehicle trunk. A wide variety of standard
vehicle mounting systems are available to meet specific customer needs. The
EnVoy is ideally suited for fixed in-vehicle computing and communication
applications including logistics management, computer-aided dispatch and
Geographic Information Systems/Global Positioning System mapping. The primary
market for Envoy is public services (Police, Fire, EMS and Utility) markets.
FieldWorks 2000 Series Mobile Data Server (MDS): The FieldWorks 2000 Series
was developed for mission critical communication applications. The FieldWorks
2000 Series is the communication interface to deployed personnel in remote
locations in all types of vehicles. The Graphical Information System (GIS)
allows personnel to graphically and numerically identify precisely where they
are on a map and provide the same visual and data information for superiors in a
real-time secure basis. Real time reliable communication of logistical, mission
status, location and movement is paramount to the success of the application for
which this product was designed and is used.
Field Lite: The Field Lite handheld computer provides users full PC
performance and connectivity in a small lightweight, rugged package. The Field
Lite is used by field communication personnel for sending and receiving secure
text messages, maps and collecting critical data. When connected to a GPS
receiver, the Field Lite can identify location points and communicate that
information wirelessly to assist in safe, expeditious navigation of mission
objectives. The Field Lite is used in a variety of logistical and data
collection applications where rugged, daylight readable and full PC technology
is required by users.
The Field Lite and Power Lite are products of Kontron, and are marketed and
sold exclusively in North America by the Company. Both of these products began
shipping in the second quarter of 2001.
Professional Services. The Company provides Professional Services along
with its products to gain a competitive advantage in the rugged mobile computing
market. Programs offered by the Company include consulting services relating to
product application, technical support, project management, product
implementation and troubleshooting on post-installation questions. The Company
provides a one-year warranty program including free telephone technical support
as well as warranty extensions and custom hardware and software service/support
offerings. The Company offers optional, advance exchange, replacement unit pools
for large volume customers to maximize performance. Software integration
services, including loading and testing of multiple software applications, can
be provided to relieve end users of the burden of installing software. On-site
product training and consultation services tailored to customer requirements can
also be provided.
3
Manufacturing. The Company initiated the outsourcing of some of its
manufacturing activities to Kontron subsidiaries during fiscal year 2001. This
has improved inventory management, reduced product and production costs, and
enhanced product quality. Further outsourcing within the Kontron group of
companies will occur as opportunities to reduce costs and improve product
quality are identified. The FieldWorks 8000 Series assembly, all platform repair
and final integration work continue to be performed at the Company. Parts for
the EnVoy MDS and the FieldWorks 2000 Series MDS are manufactured by Kontron in
Germany with final assembly performed at the Company. The Power Lite, Field Lite
and IN Rave are manufactured by Kontron in Germany.
Quality Management. The Company employs comprehensive quality control
systems. The Company received ISO 9001 quality assurance certification in March
1996 and was re-certified in May 2001.
Sales and Marketing / Customers. The Company's direct sales force focuses
its efforts on establishing and maintaining relationships with key and strategic
accounts. Specific territories have been assigned to the sales force located
throughout the United States. Other segments of the market are addressed by
sales through value-added resellers and systems integrators that typically sell
systems that have been configured for specific end-user applications through the
addition of hardware, software or services. Resellers and integrators generally
target large- to mid-size accounts, with the exception of military integrators,
or prime contractors, which target large military accounts. Additionally, the
Company sells platforms to the United States Government via the General Services
Administration (GSA) schedule.
Since late 2000, the Company has been distributing its products in Europe,
Middle East and Africa (EMEA) through the Kontron direct sales channel. As of
midyear 2001, the Company has extended the direct sales channel to include Asia
by utilizing the sales staff of Kontron Asia, a subsidiary of Kontron Embedded
Computers AG, located in Taiwan. Sales in EMEA and Asia showed quarter over
quarter growth during 2001. See Note 10 to the Financial Statements attached
hereto for a breakdown of export sales by geographic location.
For the year ended December 30, 2001, sales to the United States Army
represented 28% of net sales. For the year ended December 31, 2000, sales to
John Deere Information Systems represented 11% of net sales. For the year ended
January 2, 2000, sales to Ryder Transportation Services represented 26% of net
sales. The amount of revenue contributed by each product line is set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" below.
Backlog. The Company believes that backlog is not a meaningful indicator of
its future business prospects due to the potentially long customer sales cycle
and significant variations in the size and delivery schedules of orders received
by the Company. As a result, the Company does not believe that backlog at any
particular date is necessarily indicative of future results.
Competition. The Company's products face direct competition from companies
producing portable computers intended for field use such as Dolch Computer
Systems; Getac Corp.; Itronix Corp.; Paravant Computer Systems, Inc.; Motorola,
Inc.; Data 911, Litton Industries, Inc., and Panasonic Personal Computer
Company. The Company believes its primary competitive factors relate to product
design and feature differentiation, product pricing, functionality, product
dimensions and technology enhancements. The mobile computer market continues to
mature. To the extent the Company and its direct competitors expand and develop
this market niche, other manufacturers may turn their attention to this niche
and begin to develop products and services directly competitive with those
offered by the Company. The Company's computing platforms also face indirect
competition from a variety of different companies and products, including
consumer portable personal computers, customized portable personal computers and
single-purpose diagnostic and data collection instruments.
Research and Development. In conjunction with Kontron engineering teams
from around the world, the Company designs mobile computer systems, subsystems
and application specific custom systems. The Company believes that its efforts
in this area have improved time to market and reduced development costs. The
Company intends to continue to expand its products and services by providing a
greater range of expandability and features in existing products. The Company
has successfully developed new products with the Kontron companies maximizing
the technological expertise within all companies. Through the use of these
resources, the Company has access to a wide variety of specialized and/or
lower-cost design talent, and gained new relationships with key technology
suppliers. The use of non-Kontron design contractors was significantly reduced
in 2001 resulting in reduced R&D costs. Research and development expenses were
$1.2 million in 2001, $4.2 million in 2000 and $3.4 million in 1999.
Intellectual Property. The Company uses the following marks in connection
with its products: Field MousePad, Field Workstation, Technology Module, EnVoy,
Field Lite, Power Lite, IN Rave, Kontron and the Kontron Logo. FieldWorks,
Incorporated has federal trademark registrations with respect to Field MousePad,
Field WorkStation and Technology Module. These registrations are registered on
the Supplemental Register. Supplemental Registrations do not confer the same
rights as Principal Registrations. Specifically, Supplemental Registrations do
not serve as prima facie evidence of the validity of the
4
registration, the registrant's ownership of the mark, or the registrant's
exclusive right to use the mark. In addition, the filing date of the application
does not confer any right of priority. The Company is aware that there are third
parties that have claimed and may claim superior rights, in certain territories
in the United States, to the use of certain of the marks in which the Company
claims rights. Kontron and Kontron Logo are registered trademarks of Kontron
Instruments Holding N.V. and Kontron Electronik GmbH, respectively. Kontron
Electronik GmbH has filed a federal trademark application with respect to the
Field Lite Mark. Power Lite and IN Rave are unregistered trademarks of Kontron
Electronik GmbH. Kontron Mobile Computing has full unconditional licenses to use
the Field Lite, Power Lite, IN Rave, Kontron and Kontron Logo trademarks in all
sales and marketing activities.
Employees. As of December 30, 2001, the Company employed 47 full-time
employees and 1 part-time employee, of whom 20 were engaged primarily in
operations, 13 were engaged primarily in sales and marketing, 8 were engaged
primarily in engineering and research and development, and 7 were engaged
primarily in administration. The Company also employs temporary employees and
contract employees, as necessary. No employees are represented by any labor
union or other collective bargaining unit. The Company believes that its
relations with its employees are good.
Assets. All of the Company's long-lived assets are located in the United
States.
ITEM 2. Description of Property
The Company's main operations are conducted in Eden Prairie, Minnesota, at
a leased site of approximately 53,000 square feet. The lease term is November
1998 through November 2004. The Company has subleased two portions of the site:
12,422 square feet of office space has been subleased for the period of
September 1, 2000 to November 30, 2004 and 4,728 square feet of warehouse space
has been subleased with an original ending date of June 30, 2001 that has now
become month-to-month and is cancelable by either party with a 60-day notice.
The Company intends to continue to pursue potential subleasing of its facility,
as appropriate, to minimize operating expenses.
ITEM 3. Legal Proceedings
On April 28, 2000, the Company entered into an Engagement Agreement with
Goldsmith, Agio, Helms & Lynner, Ltd. ("GAH") to act as its agent to assist with
a merger, sale or similar transaction, for a minimum period of six months. The
Company cancelled the agreement with GAH after being approached by Kontron about
the transaction that eventually closed in December 2000. GAH pursued legal
proceedings against the Company and in September 2001, an arbitrator found that
the Company was required to pay damages of $792,000 to GAH. These costs have
been classified as "other expense" in the Company's 2001 and 2000 statements of
operations. For comparative purposes, payments made to GAH prior to the date of
the award by the arbitrator have been reclassified to reflect this change.
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 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
Company's fourth quarter ended December 30, 2001.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information. The Company's common stock is traded on the Over the
Counter Bulletin Board under the symbol "KMBC." Prior to August 25, 2000, the
Company's common stock was traded on the Nasdaq SmallCap Market. The following
table shows the range of high and low price information as quoted on the Over
the Counter Bulletin Board. The quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions.
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First Quarter Second Quarter Third Quarter Fourth Quarter
----------------- ---------------- --------------- ---------------
2001 2000 2001 2000 2001 2000 2001 2000
------- ------- ------ ------- ----- ------- ----- -------
Price range of common stock:
High......................................... $ 1.031 $ 3.094 $ .98 $ 2.375 $ .95 $ 1.688 $ .99 $ 1.125
Low.......................................... .50 1.219 .531 .625 .59 .75 .42 .281
Shareholders. As of March 5, 2002, there were 130 holders of record of the
Company's Common Stock.
Dividends. The Company has not paid any cash dividends since inception and
does not anticipate paying cash dividends in the foreseeable future.
ITEM 6. Selected Financial Data
Selected Statements of Operations Data:
(in thousands, except per share amounts)
Year Ended
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December 30, December 31, January 2, January 3, January 4,
2001 2000 2000 1999 1998
------------ ------------ ---------- ---------- ----------
Net sales ........................................... $ 17,306 $ 15,696 $ 25,329 $ 20,002 $ 23,815
Cost of sales ....................................... 9,487 17,390 17,950 14,200 14,620
-------- --------- -------- -------- --------
Gross profit (loss) ............................ 7,819 (1,694) 7,379 5,802 9,195
Operating expenses:
Sales and marketing ............................ 2,747 4,413 5,633 5,482 5,043
General and administrative ..................... 1,740 3,949 2,998 2,915 3,034
Research and development ....................... 1,205 4,213 3,414 3,214 1,884
Product upgrade and restructuring costs ........ -- 502 400 1,473 --
-------- --------- -------- -------- --------
Total operating expenses .................. 5,692 13,077 12,445 13,084 9,961
-------- --------- -------- -------- --------
Operating profit (loss) ............................. 2,127 (14,771) (5,066) (7,282) (766)
Gain on currency conversion ......................... 208 -- -- -- --
Interest income (expense), net ...................... (1,275) (1,765) (317) 149 (262)
Other income (expense), net ......................... (120) (641) 3 9 4
-------- --------- -------- -------- --------
Net income (loss) ................................... 940 (17,177) (5,380) (7,124) (1,024)
Beneficial conversion feature applicable to preferred
shareholders ..................................... -- (521) -- -- --
-------- --------- -------- -------- --------
Net income (loss) applicable to common shareholders . $ 940 $ (17,698) $ (5,380) $ (7,124) $ (1,024)
======== ========= ======== ======== ========
Basic and diluted loss per common share:
Net income (loss) per common share ............. $ .06 $ (1.92) $ (.61) $ (.81) $ (.12)
======== ========= ======== ======== ========
Basic weighted average common shares outstanding .... 14,945 9,241 8,874 8,799 8,242
======== ========= ======== ======== ========
Diluted weighted average common shares outstanding .. 15,029 9,241 8,874 8,799 8,242
======== ========= ======== ======== ========
Selected Balance Sheet Data:
(in thousands, except per share amounts)
Year Ended
------------------------------------------------------------------
December 30, December 31, January 2, January 3, January 4,
2001 2000 2000 1999 1998
------------ ------------ ---------- ---------- ----------
Cash and cash equivalents............................ $ 2,074 $ 553 $ 87 $ 1,690 $ 3,219
Working capital (deficit)............................ (4,382) (5,851) 1,829 4,077 11,517
Total assets......................................... 6,916 7,475 12,014 10,956 16,120
Notes payable, net................................... 6,938 5,881 2,228 -- --
Capital lease obligations............................ -- 39 80 110 70
Total debt........................................... 6,938 5,920 2,308 110 70
Accumulated deficit.................................. (36,589) (37,530) (19,832) (14,452) (7,327)
Total shareholders' equity (deficit)................. (4,018) (4,985) 1,403 5,793 12,799
6
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement Regarding Forward-Looking Statements. This report
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 report, 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 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 the various disclosures made by the Company in this report,
including in particular Exhibit 99.1 to this report, and in 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.
Operating Results. The following table sets forth certain financial data
expressed as a percentage of net sales for the periods indicated:
For the Years Ended
----------------------------------------
December 30, December 31, January 2,
2001 2000 2000
------------ ------------ ----------
Net sales .......................................................... 100% 100% 100%
Cost of sales ...................................................... 55 (111) 71
--- ---- ---
Gross profit (loss) ........................................... 45 (11) 29
Operating expenses:
Sales and marketing ........................................... 16 28 22
General and administrative .................................... 10 25 12
Research and development ...................................... 7 27 13
Product upgrade and restructuring costs ....................... -- 3 2
--- ---- ---
Total operating expenses ................................. 33 83 49
--- ---- ---
Operating income (loss) ............................................ 12 (94) (20)
Gain on currency conversion ........................................ 1 -- --
--- ---- ---
Interest income (expense), net ..................................... (7) (11) (1)
Other income (expense), net ........................................ (1) (4) *
--- ---- ---
Net income (loss) .................................................. 5% (109)% (21)%
--- ---- ---
Beneficial conversion feature applicable to preferred shareholders.. -- (3) --
--- ---- ---
Net income (loss) applicable to common shareholders ................ 5% (112)% (21)%
=== ==== ===
* reflects less than .5%
Market Trends. The demand for rugged mobile computers continues to expand
on a worldwide basis. The availability of high-powered portable computer
technology coupled with application specific technologies and the proliferation
of wireless communications contributes to the increased demand. The Company
expects increased requirements to improve the efficiency in field based work
forces and link field workers into corporate information systems.
The Company targets markets requiring portable computing platforms that can
perform multiple functions including diagnostics, data acquisition and
electronic testing, communication and monitoring.
Critical Accounting Policies. Financial Reporting Release (FRR) No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies,"
requires all companies to include a discussion of critical accounting policies
or methods used in the preparation of financial statements. The discussion and
analysis of the Company's financial condition and results of operations are
based upon its consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of its financial statements. Actual results may
differ from these estimates under different assumptions or conditions. Note 2 of
the Notes to the Consolidated Financial Statements includes a summary of the
significant accounting policies and methods used in the preparation of the
Company's Consolidated Financial Statements.
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Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The accounting
policies which the Company believes are the most critical to aid in fully
understanding and evaluating our reported financial results include revenue
recognition, inventories and warranties.
Revenue Recognition. The Company recognizes revenue in accordance with SEC
-------------------
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101), as amended by SAB 101A and 101B. SAB 101 requires that four basic
criteria must be met before revenue can be recognized: (1) persuasive evidence
of an arrangement exists; (2) delivery has occurred or services rendered; (3)
the fee is fixed and determinable; and (4) collectibility is reasonably assured.
Significant management judgments and estimates must be made and used in
connection with the revenue recognized in any accounting period. Material
differences may result in the amount and timing of our revenue for any period if
our management made different judgments or utilized different estimates.
The Company's revenue recognition policy is significant because the
Company's revenue is a key component of its results of operations. The Company
recognizes revenue upon shipment of its products. Accruals for sales returns and
other allowances are provided at the time of shipment based on experience.
Service revenue, including non-warranty work and related parts sales, is
recognized as earned. Extended warranty contracts are offered, generally as a
separately priced arrangement with the customer. Revenues related to extended
warranties are recorded as deferred revenue and recognized ratably over the term
of the related agreements. The Company has concluded that its revenue
recognition policy is appropriate and in accordance with generally accepted
accounting principles and SAB 101.
Inventories. Inventories are stated at the lower of cost or market value,
-----------
as determined by the first-in, first-out cost method. New inventory monitoring
controls were put in place in 2001 to reduce the future write-downs of inventory
due to obsolescence and to better manage inventory due to the resumption of
in-house manufacturing. All inventory is now coded to reflect the product for
which it is primarily used, allowing the Company to better manage its inventory
and to assist in making bi-weekly forecast updates. This change has also allowed
for improved analysis of the Company's inventory reserve.
The Company reviews its inventory quantities on hand and records a
provision for estimated obsolescence or unmarketable inventory based upon
assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Warranties. The Company warrants its products against defects in materials
----------
and workmanship under normal use and service for one year from the date of
purchase. 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. While the Company's warranty costs have historically
been within its expectations and the provisions established, the Company cannot
guarantee that it will continue to experience the same warranty return rates or
repair costs it has in the past.
While the Company engages in product quality programs and processes, the
Company's warranty obligation is affected by product failure rates, material
usage and service delivery costs incurred in correcting a product failure.
Should actual failure rates, material usage or service delivery costs differ
from the Company's estimates, revisions to the estimated warranty liability
would be required.
Related Party Transactions. The Company sells certain products to Kontron
and the Kontron group of companies for further resale outside North America.
These sales were approximately $1.3 million in 2001. The Company also buys
products from these related entities for further resale within North America.
These purchases were approximately $0.8 million in 2001. The Company and the
Kontron group of companies are operating under agreements regarding the sales
and purchases from each other. Such transactions are in the normal course of
business at negotiated prices comparable to similar transactions with other
customers and suppliers. Management believes the transactions with Kontron and
the Kontron group of companies are at arms length and are under terms no less
favorable to the Company than those with other customers or suppliers.
Included in the financial statements are approximately $118,500 of related
party receivables and approximately $210,100 of related party payables as of
December 30, 2001.
The Company has a credit line agreement with Kontron to provide up to 8.5
million Euros for operations ($7.7 million based on December 30, 2001 exchange
rate). Borrowings under this agreement bear interest at 11% per annum (payable
monthly), with no stated maturity date. Outstanding borrowings under this line
of credit were $6.9 million at December 30, 2001. Refer to the Liquidity and
Capital Resources section for further discussion.
8
Accounting Pronouncements. SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", became effective for fiscal years beginning
after June 15, 2000. The Company adopted SFAS No. 133 effective January 1, 2001.
SFAS No. 133 establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 did not have a material impact on the Company's
financial position or results of operations at adoption; see discussion below
regarding foreign currency forward contracts utilized later in 2001.
COMPARISON OF YEARS ENDED DECEMBER 30, 2001 AND DECEMBER 31, 2000
Net Sales. Net sales for 2001 were $17.3 million, an increase of $1.6
million or 10% from fiscal year 2000 net sales of $15.7 million. The increase
was primarily attributable to a large order from the United States Army for the
2000 Series Embedded Vehicle Server that shipped in the first two quarters of
2001.
Unit volumes of the 8000 Series represented 45% of total units in 2001
compared to 34% in fiscal year 2000. Production of the 8000 Series began in
fiscal year 2000, therefore the increase in sales in 2001 was attributable to
only a partial year's production in fiscal year 2000. Sales of the 2000 Series
Mobile Data Server represented 34% of total units in 2001 compared to 30% in
fiscal year 2000. The increase in sales was attributable to the large United
States Army order. Unit volumes of the EnVoy product represented 13% in 2001.
Production of the EnVoy product began in 2001 and, therefore, there were no
comparable sales in fiscal year 2000. Unit volumes of the 5000 Series decreased
to 6% of total unit sales in 2001 from 24% in fiscal year 2000. The decrease in
sales was attributable to the discontinuation of the 5000 Series product that
began in fiscal year 2000.
Sales by product line were as follows:
2001 2000 1999
----------- ----------- -----------
8000 Series......................................... $ 7,770,000 $ 5,313,000(1) $ --(1)
2000 Series......................................... 5,905,000 4,796,000 3,700,000
EnVoy............................................... 2,235,000(2) -- --
Field Lite.......................................... 248,000(3) -- --
IN Rave............................................. 89,000(3) -- --
Power Lite.......................................... 13,000(3) -- --
7000 Series......................................... --(4) 1,826,000(4) 9,037,000
5000 Series......................................... 1,046,000(5) 3,761,000(5) 12,592,000
----------- ----------- ----------
$17,306,000 $15,696,000 $25,329,000
=========== =========== ===========
- ----------
(1) The 8000 Series product was introduced in fiscal year 2000.
(2) The EnVoy product was introduced in 2001.
(3) The Field Lite, IN Rave and Power Lite are Kontron products. The Company
began marketing these products in 2001.
(4) The 7000 Series product was discontinued and replaced with the 8000 Series
product in fiscal year 2000.
(5) The 5000 Series product was discontinued in 2001.
International sales increased to $2.4 million, or 14% of sales in 2001 from
$2.3 million, or 15% of net sales in fiscal year 2000. The majority of
international sales are in Europe, including $1.9 million in 2001 and $1.5
million in fiscal year 2000. The Company believes that international sales as a
percentage of net sales for the year 2002 will be in the mid-teen to 20% range
with little impact on the Company's results of operations and liquidity.
Gross Margin. Gross margin (deficit) increased to $7.8 million in 2001 from
$(1.7) million in fiscal year 2000. Gross margins, as a percentage of net sales,
increased to 45% in 2001 as compared to (11)% in fiscal year 2000. The 2001
gross margin was positively impacted by increased average selling prices,
reduced direct material costs due to outsourcing within the Kontron group and
improved management of inventory. The fiscal year 2000 gross margin was
significantly impacted by $3.1 million of inventory write-downs which resulted
from product line close-outs, changes in outsourcing arrangements and other
technological and market developments. Excluding the $3.1 million of
write-downs, the gross margin in fiscal year 2000 would have been $1.4 million
and 9.0% of net sales. 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.
9
Sales and Marketing. Sales and marketing expenses include salaries,
incentive compensation, commissions, travel, trade shows, technical support and
professional services personnel and general advertising and promotion. These
expenses also include the labor and material costs related to maintaining the
Company's standard one-year warranty program. Sales and marketing expenses were
$2.7 million in 2001, a decrease of $1.7 million as compared to $4.4 million in
fiscal year 2000. As a percentage of net sales, sales and marketing expenses
decreased to 16% in 2001 as compared to 28% in fiscal year 2000. The decrease in
expenses was primarily due to a workforce reduction in fiscal year 2000. The
Company anticipates growth of sales and marketing expenses to be less than the
growth of sales in the future.
General and Administrative. General and administrative expenses include the
Company's executive, finance, information services and human resources
departments. These expenses decreased to $1.7 million in 2001 compared to $3.9
million in fiscal year 2000. As a percentage of net sales, general and
administrative expenses decreased to 10% in 2001 compared to 25% in fiscal year
2000. The decrease is due to the management workforce reduction that occurred in
August 2000, in addition to a reduction in consulting fees. The Company
anticipates growth of general and administrative expenses to be less than the
growth of sales in the future.
Research and Development. Research and development expenses are incurred in
the design, development and testing of new or enhanced products, services and
customized computing platforms. All research and development costs are expensed
as incurred. These expenses decreased to $1.2 million in 2001 from $4.2 million
in fiscal year 2000. As a percentage of net sales, research and development
expenses decreased to 7% in 2001 from 27% in fiscal year 2000. The decrease is
due to sharing research and development costs with Kontron and the synergy
gained by the combined efforts, in addition to a workforce reduction in fiscal
year 2000. The Company anticipates growth of research and development expenses
to be less than the growth of sales in the future.
Restructuring Costs. Restructuring costs were $0.5 million, or 3% of net
sales in fiscal year 2000. These costs were primarily severance charges due to
changes in the Company's management team at the time of the Kontron investment.
Gain 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." These gain (loss) amounts are
included in the net foreign currency gain of $207,664 recorded in 2001. As of
December 30, 2001, the Company's forward contract arrangements allowed the
Company to hedge up to 8.0 million Euros.
Interest Income (Expense), Net. Net interest expense of $1.3 million was
recorded in 2001 compared to $1.7 million in fiscal year 2000. The decrease in
interest expense is due to the repayment of the subordinated notes in September
2001. Additionally, financing costs of $882,000 related to warrants issued in
September 1999 were amortized over the two-year term of the subordinated notes.
The Company anticipates net interest expense will decrease in 2002 due to the
repayment of the subordinated notes. In addition, the Company anticipates a
reduction in interest expense in 2002 as a result of the planned repayment of
its borrowings from Kontron.
Other Income (Expense), Net. Other expense of approximately $119,700 was
recorded in 2001 compared to approximately $641,900 in fiscal year 2000. The
majority of the costs are related to the payments that were required to be made
to GAH.
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND JANUARY 2, 2000
Net Sales. Net sales for fiscal year 2000 were $15.7 million, a decrease of
$9.6 million or 38% from 1999 net sales of $25.3 million. The decrease in sales
was primarily attributable to the delay of the introduction of the 8000 Series
Workstation as a result of development and testing delays. Unit volumes of the
5000 Series decreased to 24% of total unit sales in fiscal year 2000 from 42% in
1999. The decrease in sales was attributable to no large customer orders in
fiscal year 2000, compared to the large order from Ryder Transportation Services
in 1999. Sales of the 2000 Series Mobile Data Server represented 30% of total
units in fiscal year 2000. Production of the 2000 Series began in mid-1999 so
data is not comparable. Unit volumes of the 8000 Series represented 34% of total
units in fiscal year 2000. Production of the 8000 Series began in mid-fiscal
year 2000 and, therefore,
10
there were no comparable sales in 1999. Unit volumes of the 7000 Series
decreased to 12% in fiscal year 2000 from 39% in 1999 due to the replacement of
the 7000 Series product with the 8000 Series product.
Sales by product line were as follows:
2000 1999 1998
----------- ----------- -----------
7000 Series .................... $ 1,826,000(1) $ 9,037,000 $12,445,000
5000 Series .................... 3,761,000(2) 12,592,000 7,547,000
2000 Series .................... 4,796,000 3,700,000 10,000(3)
8000 Series .................... 5,313,000(4) --(4) --(4)
----------- ----------- -----------
$15,696,000 $25,329,000 $20,002,000
=========== =========== ===========
- --------------
(1) The 7000 Series product was discontinued and replaced with the 8000 Series
product in fiscal year 2000.
(2) The 5000 Series product was discontinued in 2001.
(3) The 2000 Series product was introduced in 1998.
(4) The 8000 Series product was introduced in fiscal year 2000.
International sales decreased to $2.3 million, or 15% of sales in fiscal
year 2000 from $3.7 million, or 14% of net sales in 1999. The reduction was due
to the delayed introduction of the 8000 Series Workstation. The majority of
international sales are in Europe, including $1.5 million in fiscal year 2000
and $2.8 million in 1999.
Gross Margin. Gross margin (deficit) decreased to $(1.7) million in fiscal
year 2000 from $7.4 million in 1999. Gross margins, as a percentage of net
sales, decreased to (11)% in fiscal year 2000 as compared to 29% in 1999. Gross
margin was significantly impacted by $3.1 million of write-downs which resulted
from product line close-outs, changes in outsourcing arrangements and other
technological and market developments. Without the $3.1 million of write-downs,
gross margin in fiscal year 2000 would have been $1.4 million and 9.0% of net
sales.
The Company outsourced certain manufacturing activities during the first
quarter of fiscal year 2000.
Sales and Marketing. Sales and marketing expenses include salaries,
incentive compensation, commissions, travel, trade shows, technical support and
professional services personnel and general advertising and promotion. These
expenses also include the labor and material costs related to maintaining the
Company's standard one-year warranty program. Sales and marketing expenses were
$4.4 million in fiscal year 2000, a decrease of $1.2 million as compared to $5.6
million in 1999. As a percentage of net sales, sales and marketing expenses
increased to 28% in fiscal year 2000 as compared to 22% in 1999. The decrease in
expenses was primarily due to reductions in advertising, promotions and trade
show expenditures as well as a reduction in commissions and incentive
compensation due to the reduction in sales.
General and Administrative. General and administrative expenses include the
Company's executive, finance, information services and human resources
departments. These expenses increased to $3.9 million in fiscal year 2000
compared to $3.0 million in 1999. As a percentage of net sales, general and
administrative expenses increased to 25% in fiscal year 2000 compared to 12% in
1999. The increase is primarily due to fees associated with the management
services agreement related to the investment by IWHC, and recruitment expenses
due to changes in the management team during the first half of the year.
Research and Development. Research and development expenses are incurred in
the design, development and testing of new or enhanced products, services and
customized computing platforms. All research and development costs are expensed
as incurred. These expenses increased to $4.2 million in fiscal year 2000 from
$3.4 million in 1999. As a percentage of net sales, research and development
expenses increased to 27% in fiscal year 2000 from 13% in 1999. The increase was
primarily due to the development of the 8000 Series Workstation, and re-design
effort on the Series 2000 and Series 5000 workstations.
Restructuring Costs. Restructuring costs were $0.5 million in fiscal year
2000, or 3% of net sales, as compared to $0.4 million, or 2% of net sales in
1999. In fiscal year 2000, these costs were primarily severance charges due to
changes in the Company's management team at the time of the Kontron investment.
In 1999, these costs were due to severance charges from reorganization efforts
related to outsourcing the manufacturing and design of products.
Interest Expense and Other, Net. Net interest and other expense of $2.4
million was recorded in fiscal year 2000 as compared to $314,000 in 1999. The
increase in interest expense is due to borrowings on the Company's line of
credit, interest payments on its subordinated notes, interest payments to
Kontron for the operational cash credit line and payments made to GAH under the
legal proceeding described in Item 3. In addition, financing costs of $882,000
related to warrants issued in September
11
1999 are being amortized over the two-year term of the subordinated notes.
Financing costs of $437,500 related to warrants issued to Kontron in June 2000
were amortized from July 2000 through December 2000, the time of the closing of
the Kontron equity investment.
LIQUIDITY AND CAPITAL RESOURCES
The relationship with Kontron has brought new resources, products, capital
and a global sales force. During 2001, the Company began integrating global
distribution channels, augmenting go-to-market strategies and reinventing
product development and positioning plans. The Company's 2001 focus was to
stabilize and reach profitability by reducing overhead and operating costs,
increasing the average selling price on products and reducing product direct
material costs.
In 2001, the Company had a positive cash flow from operations of $622,641,
the first positive operating cash flow in the Company's history, compared to
negative cash flows from operations of $11,025,746 and $5,168,905 in fiscal
years 2000 and 1999, respectively. While the Company achieved profitability in
three of the four quarters in 2001, 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 and increasing its liquidity. Circumstances that are reasonably likely
to affect liquidity include changes in technology, dependence on key customers,
decrease in demand for the Company's products and reliance on Kontron for
financing and research and development support.
The Company intends to fund its own cash needs in 2002 without assistance
from Kontron. To be successful, the Company will focus on increased sales and
profitability, in addition to improved working capital management. The Company
has finalized a line of credit with an existing bank and if necessary, intends
to use this line of credit to fund potential cash requirements in excess of its
current cash flow projection.
On January 29, 2002, Kontron agreed to provide financial support to enable
the Company to meet its cash flow needs and obligations as and when they become
due through December 31, 2002. On September 28, 2000 (revised November 9, 2000),
the Company entered into credit line agreements with Kontron to provide up to $5
million of cash for operations. Borrowings under these agreements bear interest
at 11% per annum (payable monthly), and were due on December 15, 2000. The
agreement was revised on December 16, 2000 for Kontron to provide up to DM 10
million and further revised on April 1, 2001 to provide up to DM 14 million for
operations. On September 1, 2001 and December 28, 2001, the agreement was
revised to provide up to 8.5 million Euros for operations ($7.7 million based on
December 30, 2001 exchange rate). Borrowings under this agreement bear interest
at 11% per annum (payable monthly), with no stated maturity date. Outstanding
borrowings under this line of credit were $6.9 million at December 30, 2001.
The operating line with Kontron increased $3.9 million in 2001, mostly
early in the year, to fund increased inventory purchases for large sales in the
first and second quarters. As the year progressed, the Company was able to fund
its own operations, including the $3 million payoff of subordinated notes in
September 2001, without borrowing the equivalent additional funds from Kontron.
The Company also anticipates partial repayment of the operating line borrowings
with Kontron in 2002.
On June 29, 2000, the Company entered into a Purchase and Option Agreement
with FWRKS Acquisition Corp., a wholly owned subsidiary of Kontron Embedded
Computers AG. The agreement was amended on August 16, 2000. Under the amended
agreement, Kontron acquired 6 million shares of common stock of the Company for
a purchase price of $5.4 million. In addition, the option Kontron previously
granted to Industrial-Works Holding Co., LLC, (IWHC), a wholly owned subsidiary
of Glenmount International was amended. As amended, IWHC was granted an option
to acquire 62,000 shares of Kontron in exchange for preferred shares of the
Company that were convertible into 3.4 million shares of the Company common
stock. Both of these matters were approved at a special shareholders meeting
held on October 18, 2000 and adjourned to October 27, 2000 and the transactions
were closed in December 2000.
In addition, the Company received $2.5 million from FWRKS Acquisition Corp.
on June 30, 2000 in the form of a subordinated note bearing interest at 11% per
annum with an original maturity date of September 2001. FWRKS Acquisition Corp.
also received warrants to purchase 1.25 million shares of common stock
exercisable at $1.00 per share. The warrants were exercisable until November 15,
2000, and were recorded at their estimated fair value of $437,500 at the date of
issuance. These warrants were cancelled and the subordinated notes were forgiven
under the terms of the amended agreement described above.
On March 31, 2000, the Company issued 500,000 shares of the Company's
Series C Convertible Preferred Stock to IWHC. The Company recorded a $250,000
charge relating to the beneficial conversion feature associated with this
preferred stock. The Company issued a warrant to IWHC to purchase 100,000 shares
of common stock with an exercise price of $2.00 per share in connection with
this transaction. Subsequent to March 31, 2000, the conversion rate was adjusted
to such that the holders have the
12
right to receive a total of 1,041,666 shares of common stock upon conversion of
the Series C Convertible Participating Preferred Stock. In connection with this
conversion rate adjustment, an additional beneficial conversion feature of
$270,833 was recorded.
On February 22, 2000, the Company completed a $4.25 million equity
investment by IWHC. In exchange for the $4.25 million investment, the Company
issued 4,250,000 shares of Series B Convertible Preferred Stock (each share of
which was initially convertible into one share of Common Stock). Subsequent to
February 22, 2000, the conversion rate was adjusted to such that the holders
have the right to receive a total of 4,427,083 shares of common stock upon
conversion of the Series B Convertible Participating Preferred Stock. IWHC
received 500,000 warrants exercisable at $1.00 per share. The Company used the
net proceeds for market expansion and new product development as well as for
working capital and general corporate purposes. In December 2000, IWHC tendered
all of its shares of Series B and Series C Convertible Preferred Stock to
Kontron in exchange for shares of Kontron Common Stock.
In September 1999, the Company completed a private placement of $3.0
million in 11% subordinated notes. The notes were repaid at the September 2001
maturity date. Noteholders also received warrants to purchase 1.5 million shares
of common stock exercisable at $1.00 per share. The warrants are exercisable for
five years, and were recorded at their estimated fair value of $882,000 at the
date of issuance.
The Company's cash balance as of December 30, 2001 was $2.1 million as
compared to the December 31, 2000 balance of $0.6 million and the January 2,
2000 balance of $0.1 million. This change from 2001 to fiscal year 2000 was due
to cash provided by operations. Cash provided by operating activities totaled
$0.6 million in 2001, compared to cash used for operating activities of $11.0
million in fiscal year 2000 and $5.2 million in 1999. The Company's accounts
receivable was $3.0 million at December 30, 2001, $3.1 million at December 31,
2000 and $5.1 million at January 2, 2000. Net inventories decreased to $1.2
million at December 30, 2001 from $2.5 million at December 31, 2000 and $4.5
million at January 2, 2000. This change from 2001 to fiscal year 2000 was due to
purchases for anticipated sales on the United States Army order that shipped in
early 2001. Deferred revenue was $1.3 million at December 30, 2001, $0.7 million
at December 31, 2000 and $1.0 million at January 2, 2000. The change from 2001
to fiscal year 2000 was attributable to increased sales of extended warranties.
Accounts payable was $1.3 million at December 30, 2001, $3.2 million at December
31, 2000 and $3.8 million at January 2, 2000. Fiscal year 2000 and 1999 balances
were high due to purchasing inventory for customer orders in the fourth quarter
for anticipated sales in the first quarter with no comparable orders for sales
in the first quarter of 2002. Other accrued liabilities decreased to $0.8
million at December 30, 2001 from $1.8 million at December 31, 2000 and $0.5
million at January 2, 2000. The change from 2001 to fiscal year 2000 was due to
a $1.2 million liability in fiscal year 2000 with one of the Company's
outsourced partners to buy back Series 5000 parts as part of the product
discontinuance.
The Company purchased approximately $24,000 of property, plant and
equipment in 2001 as compared to $0.3 million in fiscal year 2000 and $0.6
million in 1999. The Company anticipates purchases of property, plant and
equipment in 2002 will remain consistent with 2001.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
As of December 30, 2001 the Company had $6.9 million outstanding on its
line of credit from Kontron. This loan bears interest at 11% 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 United States dollars. Based on its
overall foreign currency rate exposure at December 30, 2001, 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 $2.1 million in
cash and cash equivalents at December 30, 2001. Based on analysis, shifts in
money market rates would have an immaterial impact on the Company.
13
ITEM 8. Financial Statements and Supplementary Data
Page
----
Balance Sheets as of December 30, 2001 and December 31, 2000........................................................ 20
Statements of Operations for the years ended December 30, 2001, December 31, 2000 and January 2, 2000............... 21
Statements of Shareholders' Equity (Deficit) for the years ended December 30, 2001, December 31, 2000 and
January 2, 2000..................................................................................................... 22
Statements of Cash Flows for the years ended December 30, 2001, December 31, 2000 and January 2, 2000............... 23
Notes to Financial Statements....................................................................................... 24
Report of Independent Public Accountants............................................................................ 32
ITEM 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure
None.
14
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information required by this item is set forth in the Proxy Statement under
the heading Election of Directors and is incorporated herein by reference.
ITEM 11. Executive Compensation
Information required by this item is set forth in the Proxy Statement under
the heading Executive Compensation and is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is set forth in the Proxy Statement under
the heading Security Ownership of Certain Beneficial Owners and Management and
is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
Information required by this item is set forth in the Proxy Statement under
the heading Certain Transactions and is incorporated herein by reference.
15
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Annual Report:
1. Financial Statement Schedule: The following financial statement
schedule of Kontron Mobile Computing, Inc. for the fiscal years ended
December 30, 2001, December 31, 2000 and January 2, 2000, is filed as
part of this Report and should be read in conjunction with the
Financial Statements of Kontron Mobile Computing, Inc.
. Schedule II--Valuation and Qualifying Accounts
. Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be
set forth therein is included in the Financial Statements or
Notes thereto.
2. Exhibits: The Exhibits listed on the accompanying Index to Exhibits
are filed as part of, or incorporated by reference into, this Report.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company
during the fiscal quarter ended December 30, 2001.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KONTRON MOBILE COMPUTING, INC.
By /s/ Thomas Sparrvik
----------------------------
Thomas Sparrvik
Chief Executive Officer
Dated: March 28, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Thomas Sparrvik Chief Executive Officer March 28, 2002
- ----------------------------------
Thomas Sparrvik
/s/ David C. Malmberg Chairman of the Board March 28, 2002
- ----------------------------------
David C. Malmberg
/s/ Pierre Mcmaster Director March 28, 2002
- ----------------------------------
Pierre McMaster
/s/ William P. Perron Director March 28, 2002
- ----------------------------------
William P. Perron
/s/ Richard L. Poss Director March 28, 2002
- ----------------------------------
Richard L. Poss
/s/ Rudolf Wieczorek Director March 28, 2002
- ----------------------------------
Rudolf Wieczorek
17
INDEX TO EXHIBITS
Exhibit
No Description
-- -----------
3.1 Second Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to the exhibit 3.1 filed with the Company's
Registration Statement filed on Form S-1, File No. 333-18335)
3.2 Second Amended and Restated Bylaws of the Company (incorporated by
reference to the exhibit 3.4 filed with the Company's Registration
Statement filed on Form S-1, File No. 333-18335)
3.3 Articles of Merger amending the registrant's Articles of Incorporation
effective June 4, 2001 (incorporated by reference to the exhibit 3.1
filed with the Company's Report on 8-K filed June 5, 2001)
4.1 Form of Certificate for Common Stock (incorporated by reference to the
exhibit 4.1 filed with the Company's Registration Statement filed on
Form S-1, File No. 333-18335)
10.1 1994 Long Term Incentive and Stock Option Plan, as amended, including
forms of option agreements (incorporated by reference to the exhibit
10.24 filed with the Company's Registration Statement filed on Form
S-1, File No.333-18335)
10.2 Directors' Stock Option Plan (incorporated by reference to the exhibit
10.25 filed with the Company's Registration Statement filed on Form
S-1, File No. 333-18335)
10.3 Form of Mutual Confidentiality Agreement for use with third parties
(incorporated by reference to the exhibit 10.26 filed with the
Company's Registration Statement filed on Form S-1, File No.
333-18335)
10.4 Form of Employee Disclosure and Assignment Agreement (incorporated by
reference to the exhibit 10.27 filed with the Company's Registration
Statement filed on Form S-1, File No. 333-18335)
10.5 Form of Extended Limited Warranty Agreement (incorporated by reference
to the exhibit 10.31 filed with the Company's Registration Statement
filed on Form S-1, File No. 333-18335)
10.6 Option Agreement, dated as of January 21, 1997, by and between the
Company and David C. Malmberg (incorporated by reference to the
exhibit 10.33 filed with the Company's Registration Statement filed on
Form S-1, File No. 333-18335)
10.7 Warrant dated March 25, 1997, issued to R.J. Steichen & Company
(incorporated by reference to the exhibit 10.1 filed with the
Company's Report on Form 10-Q for the fiscal quarter ended April 6,
1997)
10.8 Lease Agreement, dated May 16, 1997, by and between CSM Properties,
Inc. and the Company (incorporated by reference to the exhibit 10.35
filed with the Company's Report on Form 10-K for the fiscal year ended
January 4, 1998)
10.9 Addendum to Lease, dated as of December 30, 1997, between the Company
and CSM Properties, Inc. (incorporated by reference to the exhibit
10.36 filed with the Company's Report on Form 10-K for the fiscal year
ended January 4, 1998)
10.10 Warrant to purchase shares of Common Stock Including Exhibit A to
Warrant Issued to Industrial- Works Holding Co., LLC by the Registrant
on February 18, 2000 (Incorporated by reference to the exhibit 10.41
to the Company's Registration Statement filed on Form S-2, File No.
333-34376)
10.11 Warrant to purchase shares of Common Stock Including Exhibit A to
Warrant Issued to Industrial- Works Holding Co., LLC by the Registrant
on February 23, 2000 (incorporated by reference to the exhibit 4.2 to
the Registrant's Current Report on Form 8-K dated February 23, 2000)
10.12 Form of Mutual Non-disclosure Agreement (incorporated by reference to
the exhibit 10.32 filed with the Company's Report on Form 10-K for the
fiscal year ended January 2, 2000)
10.13 Form of Non-disclosure Agreement (incorporated by reference to the
exhibit 10.33 filed with the Company's Report on Form 10-K for the
fiscal year ended January 2, 2000)
18
Exhibit
No Description
-- -----------
10.14 Form of International Distributor Agreement (incorporated by reference
to the exhibit 10.34 filed with the Company's Report on Form 10-K for
the fiscal year ended January 2, 2000)
10.15 Form of Product Evaluation Agreement (incorporated by reference to the
exhibit 10.35 filed with the Company's Report on Form 10-K for the
fiscal year ended January 2, 2000)
10.16 Form of OEM Agreement (incorporated by reference to the exhibit 10.36
filed with the Company's Report on Form 10-K for the fiscal year ended
January 2, 2000)
10.17 Form of Sales Representative Agreement (incorporated by reference to
the exhibit 10.37 filed with the Company's Report on Form 10-K for the
fiscal year ended January 2, 2000)
10.18 Sublease agreement between FieldWorks, Inc. and Four 51, Inc. dated
July 19, 2000 (incorporated by Reference to the exhibit 10.1 filed
with the Company's Report on Form 10-Q for the fiscal quarter Ended
October 1, 2000)
10.19 Agreement and Consent Regarding Sublease between CSM Properties, Inc.,
FieldWorks, Inc. and Four 51, Inc. dated August 8, 2000 (incorporated
by reference to the exhibit 10.2 filed with the Company's Report on
Form 10-Q for the fiscal quarter ended October 1, 2000)
10.20 Operating Protocol Memorandum with Kontron Embedded Computers AG dated
July 11, 2000 (incorporated by reference to the exhibit 10.7 filed
with the Company's Report on form 10-Q for the fiscal quarter ended
July 2, 2000)
10.21 Sublease agreement between FieldWorks, Inc. and Alternative Business
Furniture, Inc. dated December 11, 2000 (incorporated by reference to
the exhibit 10.38 filed with the Company's Report on 10-K for the
fiscal year ended December 31, 2000)
10.22 Agreement and Consent Regarding Sublease between CSM Properties, Inc.,
FieldWorks, Inc. and Alternative Business Furniture, Inc. dated
December 20, 2000 (incorporated by reference to the exhibit 10.39
filed with the Company's Report on 10-K for the fiscal year ended
December 31, 2000)
10.23 Employment Agreement with Thomas Sparrvik dated November 8, 2000
(incorporated by reference to the exhibit 10.40 filed with the
Company's Report on 10-K for the fiscal year ended December 31, 2000)
10.24 2002 Compensation Plan for Thomas Sparrvik dated November 12, 2001
(filed herewith)
10.25 Letter dated March 28, 2002 from Kontron Mobile Computing, Inc. to
the Securities and Exchange Commission (filed herewith)
23.1 Consent of Arthur Andersen LLP (filed herewith)
99.1 Cautionary Statement (filed herewith)
19
BALANCE SHEETS
December 30, December 31,
2001 2000
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ............................................................... $ 2,073,970 $ 552,887
Accounts receivable, net of allowance for doubtful accounts of $317,200 and $334,100 .... 2,834,150 3,048,614
Accounts receivable, related parties .................................................... 118,472 47,837
Inventories ............................................................................. 1,191,276 2,487,643
Prepaid expenses and other .............................................................. 334,156 472,287
------------ ------------
Total current assets ......................................................... 6,552,024 6,609,268
------------ ------------
Property and Equipment:
Computers and equipment ................................................................. 1,114,125 1,699,278
Furniture and fixtures .................................................................. 795,387 943,795
Leasehold improvements .................................................................. 346,099 331,736
Less: Accumulated depreciation and amortization ......................................... (1,911,244) (2,116,720)
------------ ------------
Property and equipment, net ...................................................... 344,367 858,089
Deposits and Other Assets, net .......................................................... 19,764 7,774
------------ ------------
Total Assets ............................................................................ $ 6,916,155 $ 7,475,131
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ........................................................................ $ 1,118,581 $ 2,992,439
Accounts payable, related parties ....................................................... 210,054 200,384
Accrued warranty and product upgrade .................................................... 332,169 507,099
Accrued compensation and benefits ....................................................... 257,398 285,893
Other accrued liabilities ............................................................... 771,502 1,816,182
Deferred revenue ........................................................................ 1,306,563 738,994
Current maturities of capitalized lease obligations ..................................... -- 38,598
Notes payable:
Subordinated note, due September 2001 ............................................ -- 3,000,000
Less: Discount on notes payable .................................................. -- (330,750)
Note to Kontron Embedded Computers AG for operating line ......................... 6,937,700 3,211,583
------------ ------------
Notes payable, net ...................................................................... 6,937,700 5,880,833
------------ ------------
Total current liabilities .................................................... 10,933,967 12,460,422
------------ ------------
Total liabilities ............................................................ 10,933,967 12,460,422
------------ ------------
Commitments and Contingencies (Note 8)
Shareholders' Equity (Deficit):
Series B Convertible Preferred Stock, $.001 par value, 4,250,000 shares authorized;
4,250,000 issued and outstanding at December 30, 2001 4,250 4,250
Series C Convertible Preferred Stock, $.001 par value, 500,000 shares authorized;
500,000 issued and outstanding at December 30, 2001 500 500
Common stock, $.001 par value, 30,000,000 shares authorized; 14,952,926 and 14,894,426
issued and outstanding ............................................................... 14,953 14,894
Additional paid-in capital .............................................................. 32,551,972 32,524,911
Accumulated deficit ..................................................................... (36,589,487) (37,529,846)
------------ ------------
Total shareholders' equity (deficit) ......................................... (4,017,812) (4,985,291)
------------ ------------
Total liabilities and shareholders' equity (deficit) .................................... $ 6,916,155 $ 7,475,131
============ ============
The accompanying notes are an integral part of these financial statements.
20
STATEMENTS OF OPERATIONS
For the Years Ended
-----------------------------------------
December 30, December 31, January 2,
2001 2000 2000
------------ ------------ -----------
Net Sales ............................................. $17,306,146 $ 15,695,581 $25,329,192
Cost of Sales . ....................................... 9,486,877 17,389,626 17,950,297
----------- ------------ -----------
Gross profit (loss) .............................. 7,819,269 (1,694,045) 7,378,895
----------- ------------ -----------
Operating Expenses:
Sales and marketing .............................. 2,747,064 4,413,415 5,632,785
General and administrative ....................... 1,739,711 3,949,925 2,998,141
Research and development ......................... 1,205,491 4,212,734 3,413,955
Restructuring costs .............................. -- 501,805 399,978
----------- ------------ -----------
Total operating expenses .................... 5,692,266 13,077,879 12,444,859
----------- ------------ -----------
Operating profit (loss) ..................... 2,127,003 (14,771,924) (5,065,964)
Gain on currency conversion ........................... 207,664 -- --
Interest income (expense), net ........................ (1,274,607) (1,764,760) (317,511)
Other income (expense), net ........................... (119,701) (640,735) 3,417
----------- ------------ -----------
Net income (loss) ..................................... 940,359 (17,177,419) (5,380,058)
Beneficial conversion feature applicable to preferred
shareholders ....................................... -- (520,833) --
----------- ------------ -----------
Net income (loss) applicable to common shareholders ... $ 940,359 $(17,698,252) $(5,380,058)
=========== ============ ===========
Basic and Diluted Income (Loss) Per Common Share:
Net income (loss) per common share .................... $ .06 $ (1.92) $ (.61)
----------- ------------ -----------
Basic weighted average common shares outstanding ...... 14,945,293 9,240,580 8,874,473
=========== ============ ===========
Diluted weighted average common shares outstanding .... 15,028,848 9,240,580 8,874,473
=========== ============ ===========
The accompanying notes are an integral part of these financial statements.
21
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Total
Preferred Stock Common Stock Additional Shareholders'
------------------ -------------------- Paid-in Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficit)
--------- ------ ---------- ------- ----------- ------------ -------------
Balance, January 3, 1999 ....... -- $ -- 8,823,926 $ 8,824 $20,235,651 $(14,451,536) $ 5,792,939
Exercise of stock options ...... -- -- 70,500 70 70,430 -- 70,500
Issuance of warrants ........... -- -- -- -- 920,000 -- 920,000
Net loss ....................... -- -- -- -- -- (5,380,058) (5,380,058)
--------- ------ ---------- ------- ----------- ------------ ------------
Balance January 2, 2000 ........ -- -- 8,894,426 8,894 21,226,081 (19,831,594) 1,403,381
Issuance of Series B Convertible
Preferred Stock, net of
offering costs ............... 4,250,000 4,250 -- -- 4,109,674 -- 4,113,924
Issuance of Series C Convertible
Preferred Stock, net of
offering costs ............... 500,000 500 -- -- 959,500 -- 960,000
Beneficial conversion feature
applicable to preferred
shareholders ................. -- -- -- -- 520,833 (520,833) --
Issuance of common stock, net of
offering costs ............... -- -- 6,000,000 6,000 5,271,323 -- 5,277,323
Issuance of warrants ........... -- -- -- -- 437,500 -- 437,500
Net loss ....................... -- -- -- -- -- (17,177,419) (17,177,419)
--------- ------ ---------- ------- ----------- ------------ ------------
Balance, December 31, 2000 ..... 4,750,000 4,750 14,894,426 14,894 32,524,911 (37,529,846) (4,985,291)
Exercise of stock options ...... -- -- 58,500 59 27,061 -- 27,120
Net income ..................... -- -- -- -- -- 940,359 940,359
--------- ------ ---------- ------- ----------- ------------ ------------
Balance, December 30, 2001 ..... 4,750,000 $4,750 14,952,926 $14,953 $32,551,972 $(36,589,487) $ (4,017,812)
========= ====== ========== ======= =========== ============ ============
The accompanying notes are an integral part of these financial statements.
22
STATEMENTS OF CASH FLOWS
For the Years Ended
-----------------------------------------
December 30, December 31, January 2,
2001 2000 2000
------------ ------------ -----------
Operating Activities:
Net income (loss) ........................................................... $ 940,359 $(17,177,419) $(5,380,058)
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities--
Depreciation and amortization .......................................... 507,439 822,478 683,086
Gain on currency conversion ............................................ (207,664) -- --
Non-cash financing ..................................................... 330,750 878,500 148,250
Loss on disposal of property and equipment ............................. 30,144 254,116 --
Changes in operating items:
Accounts receivable ............................................... 143,829 1,964,477 (1,130,562)
Inventories ....................................................... 1,296,367 2,026,021 (1,112,920)
Prepaid expenses and other ........................................ 126,141 205,471 (546,450)
Accounts payable .................................................. (1,864,188) (570,645) 1,959,282
Accrued expenses .................................................. (1,248,105) 793,854 14,058
Deferred revenue .................................................. 567,569 (222,599) 196,409
----------- ------------ -----------
Net cash provided by (used for) operating activities ................... 622,641 (11,025,746) (5,168,905)
----------- ------------ -----------
Investing Activities:
Purchase of property and equipment ..................................... (23,861) (302,250) (554,412)
Proceeds from sales of property and equipment .......................... -- 34,200 --
----------- ------------ -----------
Net cash used for investing activities ................................. (23,861) (268,050) (554,412)
----------- ------------ -----------
Financing Activities:
Proceeds from notes to Kontron Embedded Computers AG ................... 3,933,781 3,211,583 --
Proceeds from issuance of preferred stock .............................. -- 5,073,924 --
Issuance (repayments) of subordinated notes ............................ (3,000,000) -- 3,000,000
Proceeds from issuance of common stock ................................. 27,120 5,277,323 70,500
Net line of credit borrowings (repayments) ............................. -- (1,761,731) 1,079,750
Payment of capitalized lease obligations ............................... (38,598) (41,202) (30,616)
----------- ------------ -----------
Net cash provided by financing activities .............................. 922,303 11,759,897 4,119,634
----------- ------------ -----------
Change in Cash and Cash Equivalents ......................................... 1,521,083 466,101 (1,603,683)
Cash and Cash Equivalents, beginning of year ................................ 552,887 86,786 1,690,469
----------- ------------ -----------
Cash and Cash Equivalents, end of year ...................................... $ 2,073,970 $ 552,887 $ 86,786
=========== ============ ===========
Supplemental Cash Flow Disclosure:
Cash paid for interest ...................................................... $ 1,349,856 $ 579,130 $ 236,212
=========== ============ ===========
Noncash Investing and Financing Activities:
Issuance of warrants ........................................................ $ -- $ 437,500 $ 920,000
=========== ============ ===========
The accompanying notes are an integral part of these financial statements.
23
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business
Operating Activities. Kontron Mobile Computing, Inc. ("Kontron Mobile
Computing" or "the Company"), was incorporated in Minnesota in 1992 under its
former name of FieldWorks, Incorporated and is dedicated to the development and
sale of rugged portable computing solutions. The Company's computer platforms
are designed for demanding field environments, meeting military standards for
shock, vibration, moisture and temperature extremes. The Company's products have
been designed with a modular system configuration that allows expansion paths
including desktop-like ISA/PCI computer card expansion slots, PC card slots,
serial ports, universal serial bus and custom modules. As a result, all
platforms are flexible "electronic toolboxes" that integrate the user's
application-specific tools and technologies into one custom, rugged mobile
solution.
Kontron Mobile Computing's focus is providing workstations data
acquisition, mobile data communications and test and measurement applications in
its targeted vertical markets. The Company provides professional services
including consulting services relating to product application, technical
support, project management, product implementation and troubleshooting on
post-installation questions. Software integration services, including loading
and testing of multiple software applications, can be provided to relieve end
users of the burden of installing software. On-site product training and
consultation services tailored to customer requirements can also be provided.
Kontron Embedded Computers AG Equity Investment. On June 29, 2000, the
Company entered into a Purchase and Option Agreement with FWRKS Acquisition
Corp., a wholly owned subsidiary of Kontron Embedded Computers AG (Kontron). The
agreement was amended on August 16, 2000. Under the amended agreement, Kontron
acquired 6 million shares of common stock of the Company for a purchase price of
$5.4 million. In addition, the option Kontron previously granted to
Industrial-Works Holding Co., LLC, (IWHC), a wholly owned subsidiary of
Glenmount International was amended. As amended, IWHC was granted an option to
acquire 62,000 shares of Kontron in exchange for preferred shares of the Company
that were convertible into 3.4 million shares of the Company common stock. Both
of these matters were approved at a special shareholders meeting held on October
18, 2000 and adjourned to October 27, 2000 and the transactions were closed in
December 2000. As a result, Kontron and its affiliates control approximately 65%
of Kontron Mobile Computing through 7,694,492 shares of common stock and
4,750,000 shares of Series B and C Preferred Convertible Stock convertible into
5,468,750 shares of common stock of Kontron Mobile Computing.
Significant Risks and Uncertainties. The relationship with Kontron has
brought new resources, products, capital and a global sales force. During 2001,
the Company began integrating global distribution channels, augmenting
go-to-market strategies and reinventing product development and positioning
plans. The Company's 2001 focus was to stabilize and reach profitability by
reducing overhead and operating costs, increasing the average selling price on
products and reducing product direct material costs.
In 2001, the Company had a positive cash flow from operations of $622,641,
the first positive operating cash flow in the Company's history, compared to
negative cash flows from operations of $11,025,746 and $5,168,905 in fiscal
years 2000 and 1999, respectively. While the Company achieved profitability in
three of the four quarters in 2001, 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 and increasing its liquidity. Circumstances that are reasonably likely
to affect liquidity include changes in technology, dependence on key customers,
decrease in demand for the Company's products and reliance on Kontron for
financing and research and development support.
The Company intends to fund its own cash needs in 2002 without assistance
from Kontron. To be successful, the Company will focus on increased sales and
profitability, in addition to improved working capital management. The Company
has finalized a line of credit with an existing bank and if necessary, intends
to use this line of credit to fund potential cash requirements in excess of its
current cash flow projection.
On January 29, 2002, Kontron agreed to provide financial support to enable
the Company to meet its cash flow needs and obligations as and when they become
due through December 31, 2002. On September 28, 2000 (revised November 9, 2000),
the Company entered into credit line agreements with Kontron to provide up to $5
million of cash for operations. Borrowings under these agreements bear interest
at 11% per annum (payable monthly), and were due on December 15, 2000. The
agreement was revised on December 16, 2000 for Kontron to provide up to DM 10
million and further revised on April 1, 2001 to provide up to DM 14 million for
operations. On September 1, 2001 and December 28, 2001, the agreement was
revised to provide up to 8.5 million Euros for operations ($7.7 million based on
December 30, 2001 exchange rate.) Borrowings under this agreement bear interest
at 11% per annum (payable monthly), with no stated maturity date. Outstanding
borrowings under this line of credit were $6.9 million at December 30, 2001.
24
2. Summary of Significant Accounting Policies
Fiscal Year. Fiscal years end on the Sunday closest to December 31st. All
references herein to "2001", "2000" and "1999" represent the fiscal years ended
December 30, 2001, December 31, 2000 and January 2, 2000 respectively, each of
which were 52 week years.
In 2002, the Company will change to a fiscal year ending on December 31.
The Company believes that this change will not significantly affect the
comparability of the financial statements.
Earnings (Loss) Per Common Share. Basic earnings (loss) per share is
computed by dividing net income (loss) by the weighted average number of shares
of common stock outstanding during the fiscal year. Diluted earnings (loss) per
share is computed under the treasury stock method and is calculated to compute
the dilutive effect of potential common shares.
A reconciliation of these amounts is as follows:
2001 2000 1999
----------- ------------ -----------
Net income (loss) applicable to common shareholders ...... $ 940,359 $(17,698,252) $(5,380,058)
=========== ============ ===========
Weighted average common shares outstanding ............... 14,945,293 9,240,580 8,874,473
Dilutive potential common shares ......................... 83,555 -- --
----------- ------------ -----------
Weighted average common and dilutive shares outstanding .. 15,028,848 9,240,580 8,874,473
=========== ============ ===========
Basic earnings (loss) per share .......................... $ .06 $ (1.92) $ (.61)
=========== ============ ===========
Diluted earnings (loss) per share ........................ $ .06 $ (1.92) $ (.61)
=========== ============ ===========
Potential common shares of 10,212,604, 10,473,854 and 9,557,603 related to
options, warrants and convertible preferred stock were excluded from the
computation of diluted loss per share for 2001, 2000 and 1999 as inclusion of
these shares would have been antidilutive.
Cash and Cash Equivalents. Cash and cash equivalents consist of amounts
held in the Company's checking accounts and money market funds with original
maturities of 90 days or less. The carrying value of these instruments
approximates fair value.
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:
December 30, 2001 December 31, 2000
----------------- -----------------
Raw materials........................... $ 556,823 $ 1,026,833
Work in process......................... 140,899 259,485
Finished goods.......................... 493,554 1,201,325
----------- -----------
Total.............................. $ 1,191,276 $ 2,487,643
=========== ===========
Property and Equipment. Property and equipment are recorded at cost. Repair
and maintenance costs which do not significantly extend the lives of the
respective assets are expensed as incurred. Depreciation is computed using the
straight-line method over the related assets' useful lives, ranging from two to
seven years.
Warranties. The Company warrants its products against defects in materials
and workmanship under normal use and service for one year from the date of
purchase. 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.
Revenue Recognition. The Company recognizes sales upon shipment of its
products. Accruals for sales returns and other allowances are provided at the
time of shipment based on experience. Service revenue, including non-warranty
work and related parts sales, is recognized as earned. Extended warranty
contracts are offered, generally as a separately priced arrangement with the
customer. Revenues related to extended warranties are recorded as deferred
revenue and recognized ratably over the term of the related agreements.
Significant Customers. Sales to the United States Army represented 28% of
net sales in 2001. Sales to John Deere Information Systems represented 11% of
net sales in fiscal year 2000. Sales to Ryder Transportation Services
represented 26% of net sales in 1999.
25
Research and Development. Research and development costs are charged to
expense as incurred.
Concentrations of Credit Risk. At December 30, 2001, there was not a
significant portion of outstanding receivables attributable to any one customer.
The Company's exposure to concentrations of credit risk relates primarily to
trade receivables. This exposure is limited due to the large number of customers
and their dispersion across several vertical markets and geographies. The
Company controls potential credit risk by performing credit evaluations for all
customers and requires letters of credit, bank guarantees and advance payments,
if deemed necessary.
Use of Estimates. 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 reserves,
useful lives of property and equipment and warranty costs. Ultimate results
could differ from those estimates.
Accounting Pronouncements. SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", became effective for fiscal years beginning
after June 15, 2000. The Company adopted SFAS No. 133 effective January 1, 2001.
SFAS No. 133 establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 did not have a material impact on the Company's
financial position or results of operations at adoption; see discussion below
regarding foreign currency forward contracts utilized later in 2001.
Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial
Statements" was issued in December 1999 and provides further guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the Securities and Exchange Commission. The Company adopted SAB No.
101 in the fourth quarter of fiscal year 2000, as required. The adoption did not
have a material impact on the Company's financial position or results of
operations.
Foreign Currency Transactions. As described in Note 5, 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." These gain (loss) amounts are
included in the net foreign currency gain of $207,664 recorded in 2001. As of
December 30, 2001, the Company's forward contract arrangements allowed the
Company to hedge up to 8.0 million Euros.
Related Party Transactions. The Company sells certain products to Kontron
and the Kontron group of companies for further resale outside North America.
These sales were approximately $1.3 million in 2001. The Company also buys
products from these related entities for further resale within North America.
These purchases were approximately $0.8 million in 2001. The Company and the
Kontron group of companies are operating under agreements regarding the sales
and purchases from each other. Such transactions are in the normal course of
business at negotiated prices comparable to similar transactions with other
customers and suppliers. Management believes the transactions with Kontron and
the Kontron group of companies are at arms length and are under terms no less
favorable to the Company than those with other customers or suppliers.
Included in the financial statements are approximately $118,500 of related
party receivables and approximately $210,100 of related party payables as of
December 30, 2001.
3. Restructuring Costs
During fiscal year 2000, the Company announced certain organizational
restructuring changes related to the Kontron transaction. The management
reorganization was designed to reduce ongoing administrative and operating
expenses, and further streamline the organization in preparation for Kontron's
increased involvement with the Company. During 1999, the Company
26
incurred restructuring costs due to severance charges from reorganization
efforts related to outsourcing certain aspects of the manufacturing and design
of products.
The reserves remaining at December 30, 2001 and December 31, 2000 were $0
and $44,300, respectively.
4. Income Taxes
The Company accounts for income taxes under the liability method, which
requires recognition of deferred income tax assets and liabilities for the
expected future income tax consequences under enacted tax laws of temporary
differences between the financial reporting and tax bases of assets and
liabilities.
A reconciliation of the Company's statutory tax rate to the effective rate
is as follows:
2001 2000 1999
---- ---- ----
Federal statutory rate ........................... 34% 34% 34%
State taxes, net of federal tax benefit .......... 4% 4% 4%
Valuation allowance .............................. (38)% (38)% (38)%
--- --- ---
Total ....................................... --% --% --%
=== === ===
As of December 30, 2001, the Company had approximately $29 million of net
operating loss carryforwards for federal income tax purposes that are available
to offset future taxable income through the year 2021. These carryforwards will
be subject to an annual limitation as a result of a deemed change in ownership
under the tax regulations at the time of the Kontron transaction in December
2000.
The components of the Company's deferred tax asset are as follows:
2001 2000 1999
------------ ------------ -----------
Net operating loss and tax credit carryforwards ... $ 11,511,000 $ 11,493,000 $ 6,070,000
Timing differences ................................ 2,576,000 1,981,000 1,556,000
Valuation allowance ............................... (14,087,000) (13,474,000) (7,626,000)
------------ ------------ -----------
Total ........................................ $ -- $ -- $ --
============ ============ ===========
5. Line of Credit and Subordinated Notes Payable
Kontron Embedded Computers AG Line of Credit. On January 29, 2002, Kontron
agreed to provide financial support to enable the Company to meet its cash flow
needs and obligations as and when they become due through the period ending
December 31, 2002. On September 28, 2000 (revised November 9, 2000), the Company
entered into credit line agreements with Kontron to provide up to $5 million of
cash for operations. Borrowings under these agreements bear interest at 11% per
annum (payable monthly), and were due on December 15, 2000. The agreement was
revised on December 16, 2000 for Kontron to provide up to DM 10 million and
further revised on April 1, 2001 to provide up to DM 14 million for operations.
On September 1, 2001 and December 28, 2001, the agreement was revised to provide
up to 8.5 million Euros for operations ($7.7 million based on December 30, 2001
exchange rate.) Borrowings under this agreement bear interest at 11% per annum
(payable monthly), with no stated maturity date. Outstanding borrowings under
this line of credit were $6.9 million at December 30, 2001.
Subordinated Notes Payable. In September 1999, the Company completed a
private placement of $3.0 million in 11% subordinated notes. The notes were
repaid at the September 2001 maturity date. Noteholders also received warrants
to purchase 1.5 million shares of common stock exercisable at $1.00 per share.
The warrants are exercisable for five years, and were recorded at their
estimated fair value of $882,000 at the date of issuance.
6. Shareholders' Equity
On June 30, 2000, the Company issued warrants to purchase 1.25 million
shares of common stock to FWRKS Acquisition Corp., (a wholly owned subsidiary of
Kontron), exercisable at $1.00 per share. The warrants were exercisable until
November 15, 2000, and were recorded at their estimated fair value of $437,500
at the date of issuance. These warrants were cancelled upon closing of the
Kontron investment. See Note 1 for additional discussion.
27
Warrants to purchase 2,852,405 shares of the Company's common stock were
outstanding at December 30, 2001 and December 31, 2000. The warrants are
exercisable at various times through February 2007 at prices ranging from $1.00
to $7.80.
On March 31, 2000, the Company issued 500,000 shares of Series C
Convertible Preferred Stock to IWHC. The Company recorded a $250,000 charge
relating to the beneficial conversion feature associated with this preferred
stock. The Company issued a warrant to IWHC to purchase 100,000 shares of common
stock with an exercise price of $2.00 per share in connection with this
transaction. Subsequent to March 31, 2000, the conversion rate was adjusted to
such that the holders have the right to receive a total of 1,041,666 shares of
common stock upon conversion of the Series C Convertible Participating Preferred
Stock. In connection with this conversion rate adjustment, an additional
beneficial conversion feature of $270,833 was recorded.
On February 22, 2000, the Company completed a $4.25 million equity
investment by IWHC. In exchange for the $4.25 million investment, the Company
issued 4,250,000 shares of Series B Convertible Preferred Stock (each share of
which was initially convertible into one share of Common Stock). Subsequent to
February 22, 2000, the conversion rate was adjusted to such that the holders
have the right to receive a total of 4,427,083 shares of common stock upon
conversion of the Series B Convertible Participating Preferred Stock. IWHC
received 500,000 warrants exercisable at $1.00 per share. The Company used the
net proceeds for market expansion and new product development as well as for
working capital and general corporate purposes. In December 2000, IWHC tendered
all of its shares of Series B and Series C Convertible Preferred Stock to
Kontron for shares of Kontron Common Stock.
In the event of liquidation of the Company, the liquidation preference
would first be to shareholders of Series B Convertible Participating Preferred
Stock, followed by shareholders of Series C Convertible Participating Preferred
Stock, followed by shareholders of Common Stock. Voting rights of both the
Series B and Series C Convertible Participating Stock are equal to that of the
Common Stock shareholders, on an as if converted basis.
7. Stock Option and 401(k) Plans
Stock Option Plan. The Company has a Long-Term Incentive and Stock Option
Plan (the Plan). Under the Plan, options are granted at an exercise price equal
to the fair market value of the common stock at the date of grant. Incentive
stock options are granted to employees, and vest over varying periods not to
exceed ten years. The Plan is authorized to issue up to 2,500,000 shares of
common stock for such options. At December 30, 2001 and December 31, 2000,
610,127 and 313,877 shares were available for future grants.
The Company also has a Non-Employee Directors' Stock Option Plan (the
Directors' Plan). Under the Directors' Plan, each non-employee director receives
25,000 nonqualified options upon election and 10,000 options at each reelection
date. At December 30, 2001 and December 31, 2000, 137,500 and 231,000 shares
were available for future grants.
On August 4, 1999, the Board of Directors approved the repricing of all
outstanding incentive stock options for non-director employees with an exercise
price greater than $1.25. The new exercise price of such options is $1.25, an
amount greater than the fair market value of the Company's common stock on that
date. A total of 819,050 options with exercise prices of $1.53 to $6.40 were
cancelled and reissued under the terms described above. The Company is required
to account for these repriced options under variable plan accounting. No
compensation charge was recognized in 2001, 2000 or 1999, as the market value of
the Company's common stock was less than the exercise price for these options.
28
Shares subject to option are summarized as follows:
Incentive Weighted Average Non-qualified Weighted Average
Stock Options Exercise Price Stock Options Exercise Price
------------- ---------------- ------------- ----------------
Balance, January 3, 1999 ........... 1,368,950 $2.75 320,250 $5.14
Options granted ............... 1,533,300 1.48 240,000 1.62
Options canceled .............. (1,536,200) 2.29 -- --
Options exercised ............. (70,500) 1.00 -- --
---------- ----- --------- -----
Balance January 2, 2000 ............ 1,295,550 1.69 560,250 3.63
Options granted ............... 1,195,550 1.07 523,500 1.40
Options canceled .............. (1,356,150) 1.69 (82,500) 2.27
Options exercised ............. -- -- -- --
---------- ----- --------- -----
Balance, December 31, 2000 ......... 1,134,950 1.05 1,001,250 2.58
Options granted ............... 31,500 .73 110,000 .72
Options canceled .............. (327,750) 1.34 -- --
Options exercised ............. (50,000) .42 (8,500) .72
---------- ----- --------- -----
Balance, December 30, 2001 ......... 788,700 $ .96 1,102,750 $2.41
========== ===== ========= =====
Options exercisable at:
January 2, 2000 ............... 336,000 $2.54 425,150 $3.52
December 31, 2000 ............. 87,575 1.12 681,615 2.72
December 30, 2001 ............. 67,530 1.28 752,000 2.60
Additional information regarding options outstanding at December 30, 2001
is as follows:
Weighted Average
Number Exercise Weighted Average Remaining
Type of Option of Options Price Range Exercise Price Contractual Life
- -------------- ---------- ----------- ---------------- ----------------
Incentive ............... 253,750 $0.42-$1.00 $0.46 5.93
Incentive ............... 517,700 $1.01-$1.25 $1.14 5.35
Incentive ............... 17,250 $1.26-$1.88 $1.65 4.73
---------
788,700
=========
Nonqualified ............ 836,250 $0.72-$3.00 $1.37 5.90
Nonqualified ............ 95,500 $3.01-$5.00 $4.54 5.05
Nonqualified ............ 171,000 $5.01-$6.50 $6.24 4.77
---------
1,102,750
=========
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its stock option plans. Accordingly, no compensation cost has been recognized in
the accompanying statements of operations. Had compensation cost been recognized
based on the fair values of options at the grant dates consistent with the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income (loss) and net income (loss) per common share would have
been increased to the following pro forma amounts:
2001 2000 1999
-------- ------------ -----------
Net income (loss)
As reported .................... $940,359 $(17,698,252) $(5,380,058)
Pro forma ...................... $910,717 $(18,096,693) $(5,819,960)
Net income (loss) per common share
As reported .................... $ .06 $ (1.92) $ (.61)
Pro forma ...................... $ .06 $ (1.96) $ (.66)
The weighted average fair values of options granted were as follows:
Incentive Nonqualified
Stock Options Stock Options
------------- -------------
2001 grants..................................... $ 0.72 $ 0.74
2000 grants..................................... 1.14 1.54
1999 grants..................................... 1.28 1.50
29
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2001, 2000 and 1999:
2001 2000 1999
-------- ------- -------
Risk-free interest rate......................... 5.32% 6.10% 6.10%
Expected life of incentive options.............. 7 years 7 years 7 years
Expected life of nonqualified options........... 10 years 8 years 7 years
Expected volatility............................. 150% 186% 117%
Expected dividend yield......................... -- -- --
401(k) Profit-Sharing Plan. The Company has a 401(k) profit-sharing plan
(the 401(k) Plan) covering substantially all employees. Eligible employees may
elect to defer up to 15% of their eligible compensation. The Company accrues
matching contributions of 50% on the first 4% of each plan participant's
eligible contributions. The Company's matching contributions were $40,500,
$51,600 and $83,100 for 2001, 2000 and 1999, respectively.
8. Commitments and Contingencies
Leases. The Company leases its current headquarters office facilities under
an operating lease which expires November 30, 2004. The Company has subleased
two portions of the site: 12,422 square feet of office space has been subleased
for the period of September 1, 2000 to November 30, 2004 and 4,728 square feet
of warehouse space has been subleased with an original ending date of June 30,
2001 that has now become month-to-month and is cancelable by either party with a
60-day notice. Total rental payments to be received over the term of the
non-cancelable sublease agreement will be $742,000. The Company subleased its
previous office facilities under an operating lease that expired in June 1999.
Rent expense associated with operating leases was $496,600, $485,400 and
$469,700 for 2001, 2000 and 1999, respectively. The Company does not have any
capital leases as of December 30, 2001.
The following is a schedule of future minimum operating lease payments as
of December 30, 2001:
2002 ........................................ $512,000
2003 ........................................ 501,000
2004 ........................................ 449,000
Legal Proceedings. On April 28, 2000, the Company entered into an
Engagement Agreement with Goldsmith, Agio, Helms & Lynner, Ltd. ("GAH") to act
as its agent to assist with a merger, sale or similar transaction, for a minimum
period of six months. The Company cancelled the agreement with GAH after being
approached by Kontron about the transaction that eventually closed in December
2000. GAH pursued legal proceedings against the Company and in September 2001,
an arbitrator found that the Company was required to pay damages of $792,000 to
GAH. These costs have been classified as "other expense" in the Company's 2001
and 2000 statements of operations. For comparative purposes, payments made to
GAH prior to the date of the award by the arbitrator have been reclassified to
reflect this change.
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.
9. Quarterly Financial Data (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------- ---------------- ---------------- ----------------
2001 2000 2001 2000 2001 2000 2001 2000
------ ------- ------ ------- ------ ------- ------ -------
(in thousands)
Net sales........................... $5,010 $ 4,347 $4,862 $ 4,050 $3,248 $ 3,436 $4,186 $ 3,863
Gross profit (loss)................. 2,255 965 2,196 681 1,560 (2,714) 1,808 (626)
Net income (loss) applicable to
common shareholders................. $ 554 $(2,280) $ 460 $(3,775) $ (304) $(7,256) $ 230 $(4,387)
Basic and diluted earnings (loss) per
common share..................... $ .04 $ (.26) $ .03 $ (.42) $ (.02) $ (.82) $ .01 $ (.43)
30
10. Segment Reporting
Based on the requirements of Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information",
the Company has determined that development and sale of rugged portable
computing solutions is its only reportable segment.
Sales by geographic locations were as follows:
2001 2000 1999
----------- ----------- -----------
United States ........................ $14,875,000 $13,396,000 $21,667,000
Europe ............................... 1,865,000 1,469,000 2,815,000
Americas (excluding United States) ... 301,000 95,000 104,000
Asia ................................. 118,000 159,000 90,000
Middle East/Africa ................... 85,000 236,000 450,000
Australia ............................ 61,000 4,000 95,000
Russia ............................... 1,000 337,000 108,000
----------- ----------- -----------
$17,306,000 $15,696,000 $25,329,000
=========== =========== ===========
Sales by product line were as follows:
2001 2000 1999
----------- ----------- -----------
8000 Series .......................... $ 7,770,000 $ 5,313,000(1) $ --(1)
2000 Series .......................... 5,905,000 4,796,000 3,700,000
EnVoy ................................ 2,235,000(2) -- --
Field Lite ........................... 248,000(3) -- --
IN Rave .............................. 89,000(3) -- --
Power Lite ........................... 13,000(3) -- --
7000 Series .......................... --(4) 1,826,000(4) 9,037,000
5000 Series .......................... 1,046,000(5) 3,761,000(5) 12,592,000
----------- ----------- -----------
$17,306,000 $15,696,000 $25,329,000
=========== =========== ===========
- ----------
(1) The 8000 Series product was introduced in fiscal year 2000.
(2) The EnVoy product was introduced in 2001.
(3) The Field Lite, IN Rave and Power Lite are Kontron products. The Company
began marketing these products in 2001.
(4) The 7000 Series product was discontinued and replaced with the 8000 Series
product in fiscal year 2000.
(5) The 5000 Series product was discontinued in 2001.
All of the Company's long-lived assets are located in the United States.
31
Report of independent public accountants
To Kontron Mobile Computing, Inc.:
We have audited the accompanying balance sheets of Kontron Mobile Computing,
Inc. (a Minnesota corporation, formerly known as FieldWorks, Incorporated) as of
December 30, 2001 and December 31, 2000, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kontron Mobile Computing, Inc.
as of December 30, 2001 and December 31, 2000, and the results of its operations
and its cash flows for each of the three years in the period ended December 30,
2001 in conformity with accounting principles generally accepted in the United
States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule II is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 11, 2002
32
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Fiscal Balance at Additions Charged Deductions - Write- Balance at End of
- ------ ----------- ----------------- ------------------- -----------------
Year Beginning of Year to Expense Offs of Accounts Year
---- ----------------- ---------- ---------------- ----
2001 Allowance for Doubtful Accounts $ 334,100 $ 132,700 $ 149,600 $ 317,200
Accrued Restructuring Costs 44,300 -- 44,300 --
2000 Allowance for Doubtful Accounts 259,600 132,500 58,000 334,100
Accrued Restructuring Costs 230,000 390,900 576,600 44,300
1999 Allowance for Doubtful Accounts 269,800 10,200 20,400 259,600
Accrued Restructuring Costs 16,100 400,000 186,100 230,000