10-Q 1 c87457e10vq.txt FORM 10-Q -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number 000-22221 KONTRON MOBILE COMPUTING, INC. (Exact name of registrant as specified in its charter) Minnesota 41-1731723 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 7631 Anagram Drive Eden Prairie, Minnesota 55344 (Address of principal executive offices) (Zip Code) (952) 974-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The number of shares of the registrant's Common Stock, $.001 par value, outstanding as of August 10, 2004 was 15,082,926. -------------------------------------------------------------------------------- 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KONTRON MOBILE COMPUTING, INC. BALANCE SHEETS

~~SEPTEMBER~~JUNE 30, DECEMBER 31, 2004 2003 ~~2002~~(UNAUDITED) ------------ ------------ ~~(UNAUDITED)~~ ASSETS CURRENT ASSETS: Cash and cash equivalents ..........................................................~~....~~ $ 1465,~~405,270~~081 $ 21,~~031~~694,~~285~~302 Accounts receivable, net of allowance for doubtful accounts of $~~194~~191,~~600~~500 and $~~127~~158,200 .......................................................................... 23,~~034~~191,~~794~~622 32,~~015~~562,~~258~~900 Accounts receivable, related parties ...............................................~~....~~ ~~105~~157,~~681~~151 ~~119~~185,~~919~~046 Inventories ........................................................................~~....~~ 1,~~569~~743,~~981~~968 ~~975~~1,~~263~~678,254 Prepaid expenses and other .........................................................~~....~~ ~~143~~129,~~511~~564 5450,~~269~~602 ------------ ------------ Total current assets .................................................... 5,~~259~~687,~~237~~386 6,~~195~~171,~~994~~104 ------------ ------------ Property and Equipment: Computers and equipment .........................................................~~...~~ 979,601 1,172,007 ~~1,163,624~~ Furniture and fixtures ..........................................................~~...~~ ~~800~~797,~~706~~746 800,706 Leasehold improvements ..........................................................~~...~~ 346,099 346,099 Less: Accumulated depreciation and amortization .................................~~...~~ (2,~~205~~065,~~740~~793) (2,~~129~~226,~~623~~309) ------------ ------------ Property and equipment, net ................................................... ~~113~~57,~~072~~653 ~~180~~92,~~806~~503 Deposits and Other Assets, net .....................................................~~....~~ 63,~~557~~216 396,~~398~~556 ------------ ------------ TOTAL ASSETS .......................................................................~~....~~ $ 5,~~378~~748,~~866~~255 $ 6,~~416~~270,~~198~~163 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable ...................................................................~~....~~ $ ~~299~~703,~~865~~764 $ ~~401~~144,~~845~~527 Accounts payable, related parties ..................................................~~....~~ 1492,~~161,812~~310 ~~412~~959,~~425~~627 Accrued warranty ...................................................................~~....~~ ~~243~~140,000 ~~332~~203,~~169~~000 Accrued compensation and benefits .................................................. 183,670 255,154 Accrued interest to Kontron AG ..................................................... ~~121~~719,~~594~~109 ~~272~~450,~~312~~575 Other accrued liabilities ..........................................................~~....~~ ~~353~~34,~~108~~240 ~~340~~148,~~174~~684 Deferred revenue, short-term .......................................................~~....~~ ~~591~~272,~~860~~902 ~~797~~537,~~658~~372 ------------ ------------ Total current liabilities ..................................................... 2,~~771~~545,~~239~~995 2,~~556~~698,~~583~~939 ------------ ------------ LONG TERM LIABILITIES: Notes payable to Kontron AG ........................................................~~....~~ 6,~~536~~952,~~190~~860 7,~~462~~103,~~071~~910 Deferred revenue, long-term ........................................................~~....~~ ~~132~~581,~~989~~648 ~~266~~159,~~634~~158 ------------ ------------ Total long term liabilities ................................................... 67,~~669~~534,~~179~~508 7,~~728~~263,~~705~~068 ------------ ------------ Total Liabilities ..................................................................~~....~~ 910,~~440~~080,~~418~~503 109,~~285~~962,~~288~~007 ------------ ------------ SHAREHOLDERS' EQUITY (DEFICIT): Series B Convertible Preferred Stock, $.001 par value, 4,250,000 shares authorized; 4,250,000 issued and outstanding for both periods ...............................~~...~~ 4,250 4,250 Series C Convertible Preferred Stock, $.001 par value, 500,000 shares authorized; 500,000 issued and outstanding for both periods .................................~~...~~ 500 500 Common stock, $.001 par value, 30,000,000 shares authorized; 14,952,926 issued and outstanding for both periods ..............................~~...~~ 14,953 14,953 Additional paid-in capital .........................................................~~....~~ 32,551,972 32,551,972 Accumulated deficit ................................................................~~....~~ (36,~~633~~903,~~227~~923) (36,~~440~~263,~~765~~519) ------------ ------------ Total shareholders' equity (deficit) .................................... (4,~~061~~332,~~552~~248) (3,~~869~~691,~~090~~844) ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ...............................~~....~~ $ 5,~~378~~748,~~866~~255 $ 6,~~416~~270,~~198~~163 ============ ============

The accompanying notes are an integral part of these financial statements. 2 KONTRON MOBILE COMPUTING, INC. STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED FOR THE ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~SEPTEMBER~~JUNE 30, ------------------------------ ------------------------------ 2004 2003 ~~2002~~2004 2003 ~~2002~~ ----- ----- ----- ---- Net Sales ......................................~~...~~ $ 3,~~223~~735,~~414~~870 $ 2,~~357~~863,~~025~~672 $ 85,~~213~~882,~~796~~085 $ 74,~~858~~990,~~085~~382 Cost of Sales ..................................~~...~~ 2,~~024~~205,~~616~~643 1,~~421~~497,~~803~~541 43,~~724~~625,~~833~~274 42,~~502~~700,~~196~~217 ------------ ------------ ------------ ------------ Gross profit ............................... 1,~~198~~530,~~798~~227 ~~935~~1,~~222~~366,131 32,~~488~~256,~~963~~811 32,~~355~~290,~~889~~165 ------------ ------------ ------------ ------------ Operating Expenses: Sales and marketing ........................ ~~456~~539,~~565~~192 ~~613~~517,~~344~~371 1965,~~415,845~~678 1959,~~686,800~~280 General and administrative ................. ~~342~~387,~~300~~556 ~~402~~350,~~723~~829 ~~973~~702,~~451~~887 ~~856~~631,~~690~~151 Research and development ................... ~~235~~409,~~842~~796 ~~275~~265,~~944~~656 ~~792~~803,~~335~~189 ~~752~~556,~~478~~493 ------------ ------------ ------------ ------------ Total operating expenses ............. 1,~~034~~336,~~707~~544 1,~~292~~133,~~011~~856 32,~~181~~471,~~631~~754 32,~~295~~146,~~968~~924 ------------ ------------ ------------ ------------ Operating income (loss) ............. ~~164~~193,~~091~~683 232,275 (~~356~~214,~~789~~943) ~~307~~143,~~332~~241 ~~59,921~~ Loss on foreign currency .......................~~...~~ (1625,~~721~~312) (1925,~~523~~324) (9633,~~050~~015) (~~124~~79,~~702~~329) Interest expense, net ..........................~~...~~ (~~126~~137,~~104~~273) (~~171~~119,~~136~~676) (~~403~~274,~~744~~475) (~~520~~277,~~206~~640) Professional fees related to Kontron AG offer... (21,947) -- (117,971) -- ------------ ------------ ------------ ------------ Net income (loss) applicable to common shareholders ................................ $ 219,~~266~~151 $ ~~(547~~87,~~448)~~275 $ (~~192~~640,~~462~~404) $ (~~584~~213,~~987~~728) ============ ============ ============ ============ Basic and Diluted Income (Loss) Per Common Share: Net income (loss) per common share .............~~...~~ $ -- $ (.~~04)~~01 $ (.0104) $ (.0401) ~~-----------~~============ ~~-----------~~============ ~~-----------~~============ ~~-----------~~============ Basic and diluted weighted average common shares outstanding ...................~~......~~ 14,952,926 14,952,926 14,952,926 14,952,926 ============ ============ ============ ============

The accompanying notes are an integral part of these financial statements. 3 KONTRON MOBILE COMPUTING, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, --------------------~~---------~~ 2004 2003 ~~2002~~ ---- ---- OPERATING ACTIVITIES: Net loss ............................................................ $ (~~192~~640,~~462~~404) $ (~~584~~213,~~987~~728) Adjustments to reconcile net loss to net cash provided by (used for) operating activities -- Depreciation and amortization ................................. 7640,~~117~~304 ~~179~~55,~~365~~778 Provision for losses on accounts receivable ................... 6733,~~393~~266 29,346 Provision for accrued warranty ................................ (~~130~~63,~~204~~000) -- Loss on foreign currency ...................................... 9625,~~050~~312 ~~124~~79,~~702~~329 Changes in operating items: Accounts receivable ...................................... ~~927~~(634,~~309~~093) 1,~~637~~326,~~984~~980 Inventories .............................................. (~~594~~65,~~718~~714) (~~121~~430,~~036~~738) Prepaid expenses and other ............................... (5675,~~401~~622) ~~249~~(21,~~642~~283) Accounts payable ......................................... ~~647~~91,~~407~~920 (~~979~~72,~~209~~196) Accrued expenses ......................................... ~~(251~~102,~~331)~~284 (~~815~~341,~~025~~150) Deferred revenue ......................................... ~~(339~~158,~~443)~~020 (~~223~~198,~~959~~940) ----------- ----------- Net cash provided by (used for) operating activities .......... ~~379,921~~ (~~662~~1,027,727) 213,398 ----------- ----------- INVESTING ACTIVITIES: Purchase of property and equipment ............................ (85,~~383~~454) (339,~~818~~261) ----------- ----------- FINANCING ACTIVITIES: Repayments of notes to Kontron AG ............................. -- (1,655,349) Net (~~410,108~~payments on) ~~Net~~ proceeds from forward contracts .............~~.............~~ ~~657~~(196,~~796~~040) ~~408~~701,~~123~~876 ----------- ----------- Net cash used for financing activities ........................ (~~997~~196,~~553~~040) (1953,~~985~~473) ----------- ----------- CHANGE IN CASH AND CASH EQUIVALENTS ................................. (~~626~~1,~~015~~229,221) (~~698~~749,~~530~~336) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...................... 21,~~031~~694,~~285~~302 2,~~073~~031,~~970~~285 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD ............................ $1 465,~~405,270~~081 $ 1,~~375~~281,~~440~~949 =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest .............................................. $ ~~344,651~~-- $ ~~546~~344,~~191~~651 =========== ===========

The accompanying notes are an integral part of these financial statements. 4 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION: The accompanying unaudited financial statements of Kontron Mobile Computing, Inc. ("Kontron Mobile Computing" or "the Company") should be read in conjunction with the financial statements and notes thereto filed with the Securities and Exchange Commission in the Company's Annual Report on Form 10-K, for the fiscal year ended December 31, 2003. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the periods presented. Estimates are used for such items as allowances for doubtful accounts, inventory write-downs, useful lives of property and equipment, warranty costs and income tax valuation allowances. Ultimate results could differ from those estimates. Significant estimates included in the financial statements are allowances for doubtful accounts, inventory write-downs and warranty costs. It is reasonably possible that these significant estimates may change in the near future and the effect may be material to the financial statements. 2. INVENTORIES: Inventories are stated at the lower of cost or market value, as determined by the first-in, first-out cost method. The components of inventories were:

~~SEPTEMBER~~JUNE 30, DECEMBER 31, 2004 2003 ~~2002~~ ----~~------~~ ----~~------~~ Raw materials ....................................................... $1,~~078~~455,~~038~~339 $~~626~~1,~~560~~224,853 Work in process ..................................................... ~~172~~48,~~859~~291 59294,~~962~~884 Finished goods ...................................................... ~~319~~240,~~084~~338 ~~288~~158,~~741~~517 ---------- ---------- Total .......................................................... $1,~~569~~743,~~981~~968 $~~975~~1,~~263~~678,254 ========== ==========

3. FINANCING: Kontron AG ("Kontron") has provided the Company with a written agreement to provide financial support to enable the Company to meet its cash flow needs and obligations as and when they become due through December 31, 2004, if necessary. As of December 31, 2003, Kontron controlled approximately 65% of the Company. The Company has a line of credit agreement with Kontron which allows for borrowings of up to 8.5 million Euros for operations ($10.4 million based on June 30, 2004 exchange rate.) Borrowings under this agreement bear interest at 8% per annum (payable monthly). The maturity date of the note is July 1, 2011. Outstanding borrowings under this line of credit were approximately $7.0 million at June 30, 2004. 4. FOREIGN CURRENCY TRANSACTIONS: The Company's credit agreements with Kontron allow for borrowings which are payable in Euros. In the second quarter of 2001, the Company began utilizing foreign currency forward contracts to protect against significant fluctuations in net income (loss) caused by changes in Euro exchange rates. The Company's practice is to enter into a forward contract at the end of each quarter and settle the contract at the end of the subsequent quarter. The Company records gains and losses on these derivative contracts (which are not designated as hedging instruments for accounting purposes) in net income (loss) in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 133, "Derivatives and Hedging Activities." For the quarter ended June 5 30, 2004, the Company recorded a net loss on currency conversion of $25,312. As of June 30, 2004, the Company entered into a new forward contract whereby the Company can hedge up to 5.8 million Euros. The Company currently has no other balances or transactions conducted in a foreign currency. 5. ACCOUNTING PRONOUNCEMENTS: In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 establishes accounting and disclosure requirements for a company's obligations under certain guarantees that it has issued. A guarantor is required to recognize a liability for the obligation it has undertaken in issuing a guarantee, including the ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The objective of the initial measurement of that liability is the fair value of the guarantee at its inception. FIN 45 also requires expanded disclosure of information related to product warranty amounts recorded in the financial statements. The Company adopted the provision effective for the quarter ended March 31, 2003. The implementation of this interpretation does not have a significant impact on the financial statements. The Company warrants its products against defects in materials and workmanship under normal use and service for one year from the date of purchase with the exception of the ReVolution which has a three-year limited warranty on some components and a one-year warranty on some devices and accessories. Warranty costs for existing products, including parts and labor, are estimated based on actual historical experience. Management uses that historical data to accrue reserves to cover estimated costs based on units in the field. Management reviews the estimated warranty liability on a quarterly basis to determine its adequacy. As required under Financial Accounting Standards Board (FASB) Interpretation No. 45 (FIN 45), the following table presents the changes in the Company's warranty liability for the quarter ended June 30, 2004 and 2003:

~~Adjustments~~Aggregate toChanges ~~Warranty~~in ~~Warranty~~the ~~Amounts~~Aggregate ~~Charged~~Reductions ~~Reserve~~in ~~Amounts~~Liability for Accruals the Liability for Related to Product Period Beginning ~~Balance~~Payments ~~Claims~~Made ~~Paid~~Under tothe ~~Expense~~Warranties ~~Prior~~Issued ~~Year~~During Ending Ending Balance Warranties the Reporting Periods Balance ------------- --------- ----------- ------------ ---------- --------------- -------- June 30, 2004 $~~283~~140,000 $(2449,~~243~~642) $2449,~~243~~642 $~~(40~~140,000 June 30, 2003 $283,000 $(46,032) $~~243~~46,032 $283,000

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require prominent disclosures about an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The Company has adopted the disclosure provisions of SFAS No. 148. Accordingly, under the provisions of SFAS No. 123, the Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for its stock option plans. In accordance with APB 25, no compensation expense was recognized as the exercise price of the Company's stock options was equal to the market price of the underlying stock on the date of grant and the exercise price and number of shares subject to grant were fixed. If the Company had elected to recognize compensation expense based on the fair value of the options granted at the date of grant and in respect to shares issuable under the Company's equity compensation plans as prescribed by SFAS No. 123, net income and diluted earnings per share using the Black-Scholes option-pricing model would have been reduced to the pro forma amounts indicated in the table below: 6

Three months ended ~~Nine~~June 30, Six months ended ~~September~~June 30, ~~September 30,~~ ------------------------ ------------------------- 2004 2003 ~~2002~~2004 2003 ~~2002~~ ---- ---- ---- ---- Net income (loss), as reported ................. $ 219,~~266~~151 $~~(547~~ 87,~~448)~~275 $(~~192~~640,~~462~~404) $(~~584~~213,~~987~~728) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards ...................... (7071,~~457~~062) --(171,551) (~~468~~71,~~381~~500) (51170,~~213~~970) --------- --------- --------- --------- Pro forma net income (loss) .................... $ (4961,~~191~~911) $ (~~547~~84,~~448~~276) $(~~660~~711,~~843~~904) $(~~636~~384,~~200~~698) ========= ========= ========= ========= Net income (loss) per share: Basic and diluted - as reported .......... $ -- $ (.~~04)~~01 $ (.0104) $ (.0401) Basic and diluted - pro forma ............ $ -- (.0401) (.0405) (.0403)

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is applicable for contracts entered into or modified after June 30, 2003. The implementation of this statement does not have a significant impact on the financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Some of the provisions of this Statement are consistent with the current definition of liabilities in FASB Concepts Statement No. 6, Elements of Financial Statements. The remaining provisions of this Statement are consistent with the Board's proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own equity shares, depending on the nature of the relationship established between the holder and the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The implementation of this statement does not have a significant impact on the financial statements. 6. SUBSEQUENT EVENT: On August 6, 2004, Kontron AG announced the successful completion of its tender offer (the "Offer") for all of the outstanding shares of the Company not owned by Kontron AG at a price of $0.55 per share, net in cash. For more information about the Offer, see Part II, Item 5, "Other Information" below. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this Form 10-Q and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer, the words or phrases "believes," "anticipates," "expects," "intends," "estimates," "should," "may" or similar expressions are intended to identify such forward-looking statements, but are not the exclusive means of identifying such statements. These forward-looking statements involve risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, the following: risks associated with the development of new 7 products, market acceptance of new products and services, technological obsolescence, dependence on third-party manufacturers and suppliers, risks associated with the Company's dependence on proprietary technology, the long customer sales cycle and expenses that may continue to be incurred in connection with the pending offer by Kontron AG to acquire the shares of the Company's common stock held by minority shareholders. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances after the date of such statements. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. The Company's forward-looking statements are qualified in their entirety by the cautions and risk factors set forth in the Form 10-K filed for the year ended December 31, 2003. RECENT DEVELOPMENTS On August 6, 2004, Kontron AG announced the successful completion of its tender offer (the "Offer") for all of the outstanding shares of the Company not owned by Kontron AG at a price of $0.55 per share, net in cash. For more information about the Offer, see Part II, Item 5, "Other Information" below. RESULTS OF OPERATIONS The following table sets forth certain financial data expressed as a percentage of net sales for the periods indicated:

FOR THE THREE MONTHS ENDED FOR THE ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~ENDED~~JUNE ~~SEPTEMBER~~ 30, -------------------------- ------------------------ 2004 2003 ~~2002~~2004 2003 ~~2002~~ ---- ---- ---- ---- Net sales .........................................~~....~~ 100 % 100 % 100 % 100 % Cost of sales .....................................~~....~~ 6359 6052 5862 5754 --- --- --- --- Gross profit ................................... 3741 4048 4238 4346 Operating expenses: Sales and marketing ............................ 1415 2618 1716 2119 General and administrative ................... 10 12 12 13 Research and development ..................... 11 1710 1214 11 --- --- --- --- Total operating expenses ................ 36 40 42 43 --- --- --- --- Operating income (loss) ........................... 5 8 (4) 3 Loss on currency conversion ....................... (1) (1) -- (2) Interest expense, net ............................. (4) (4) (5) (5) Other expense ..................................... -- -- (2) -- --- --- --- --- Net income (loss) applicable to common shareholders --% 3% (11)% (4)% === === === ===

Net Sales. The Company's net sales increased $0.9 million, or 30%, to $3.7 million in the second quarter of 2004 from $2.9 million in the second quarter of 2003 and increased 18% to $5.9 million in the first six months of 2004 from $5.0 million in the first six months of 2003. The increase was due to a large order to the United States Army in 2004 with no comparable large orders in 2003. The Company continues to target key vertical markets including government, military, public services, utilities and other field service organizations. One customer, the United States Army (DFAS), accounted for 60% of net sales in the second quarter of 2004, representing $2.2 million of the Company's net sales. In the second quarter of 2003, one customer, Jackson County, Michigan, Sheriff's Department, accounted for 15% of net sales, representing $0.4 million of the Company's net sales. International sales decreased to $0.1 million, or 4% of net sales, for the second quarter of 2004 from $0.3 million, or 10% of net sales, for the comparable period in 2003. 78% and 64% of the international sales in the second quarter of 2004 and 2003, respectively, were in Europe. The Company believes that international sales as a percentage of net sales will remain relatively consistent for the remainder of 2004 with little impact on the Company's results of operations and liquidity. The Company records all sales in U.S. Dollars. 8 Gross Margin. Gross margin increased to $1.5 million, or 41% of net sales, for the second quarter of 2004 from $1.4 million, or 48% of net sales for the second quarter of 2003. Gross margin stayed consistent at $2.3 million for the first six months of 2004 and 2003. As a percentage, gross margin decreased to 38% for the first six months of 2004 from 46% in the first six months of 2003. The decrease in gross margin percent is due to lower selling prices on the ReVolution product to reduce inventory in preparation for updated ReVolution technology to be introduced later in 2004. The Company's gross margin will fluctuate as a result of a number of factors, including mix of products sold, inventory obsolescence, the proportion of international sales, large customer contracts (with the associated volume discounts) and other manufacturing expenses. We expect margins to remain relatively consistent for the remainder of 2004. Sales and Marketing. Sales and marketing expenses include salaries, incentive compensation, commissions, travel, trade shows, technical support and professional services personnel and general advertising and promotion. These expenses also include the labor and material costs related to maintaining the Company's standard one-year warranty program on all products with the exception of the ReVolution which has a three-year limited warranty on some components and a one-year warranty on some devices and accessories. Sales and marketing expenses remained consistent at $0.5 million in the second quarter of 2004 and 2003. As a percentage of net sales, sales and marketing expenses decreased to 15% for the second quarter of 2004 from 18% for the second quarter of 2003 due to higher revenue over which to allocate the expenses. In the first six months of 2004, sales and marketing expenses were $1.0 million and 16% of net sales as compared to $1.0 million and 19% of net sales in the first six months of 2003. General and Administrative. General and administrative expenses include the Company's executive, finance, information services and human resources departments. General and administrative expenses remained consistent at $0.4 million in the second quarter of 2004 and 2003. As a percentage of net sales, general and administrative expenses decreased to 10% for the second quarter of 2004 from 12% for the second quarter of 2003 due to higher revenue over which to allocate the expenses. In the first six months of 2004, general and administrative expenses were $0.7 million and 12% of net sales as compared to $0.6 million and 13% of net sales in the first six months of 2003. Research and Development. Research and development expenses are incurred in the design, development and testing of new or enhanced products, services and customized computing platforms. All research and development costs are expensed as incurred. Research and development expenses increased to $0.4 million for the first quarter of 2004, from $0.3 million for the first quarter of 2003. As a percentage of net sales, research and development costs were 11% and 10% for the second quarter of 2004 and 2003, respectively. Research and development expenses increased to $0.8 million for the first six months of 2004 from $0.6 million for the comparable period in 2003. As a percentage of net sales, research and development expenses increased to 14% for the first six months of 2004 from 11% for the first six months of 2003. This increase is due to increased R&D spending for development of new technology to be released later this year and in 2005. Loss on Currency Conversion. The Company's line of credit agreement with Kontron allow for borrowings which are payable in Euros. The Company utilizes foreign currency forward contracts to protect against significant fluctuations in net income (loss) caused by changes in Euro exchange rates. The Company's practice is to enter into a forward contract at the end of each quarter and settle the contract at the end of the subsequent quarter. The Company records gains and losses on these derivative contracts (which are not designated as hedging instruments for accounting purposes) in net income (loss) in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 133, "Derivatives and Hedging Activities." For the quarter ended June 30, 2004, the Company recorded a net loss on currency conversion of $25,312 compared to a net loss of $25,324 in the second quarter of 2003. As of June 30, 2004, the Company entered into a new forward contract whereby the Company can hedge up to 5.8 million Euros. The Company currently has no other balances or transactions conducted in a foreign currency. Interest Expense, Net. Net interest expense was approximately $137,300 for the second quarter of 2004 compared to net interest expense of approximately $119,700 for the comparable period in 2003. Net interest expense for the first six months of 2004 was approximately $274,500 compared to net interest expense of approximately $277,600 for the first six months of 2003. 9 Professional Fees Related to Kontron AG Offer. In response to the offer by Kontron AG to acquire the shares of the Company's Common Stock from minority shareholders that Kontron AG does not already own, the Company has incurred approximately $21,900 in other expense for the second quarter of 2004 and approximately $118,000 for the first six months of 2004, for legal, financial and accounting advisers related to evaluating and assessing Kontron AG's offer. LIQUIDITY AND CAPITAL RESOURCES In 2004, one of the Company's focus areas is long-term growth by introducing new products that will further penetrate existing markets as well as new and growing markets. In 2003, the Company introduced enhancements to existing product lines: an enhanced EnVoy with a Kontron-designed faster CPU module, the FW8500 with enhanced features and performance based on another Kontron-designed CPU module, and a new 12.1" high-bright display option for EnVoy. The ReVolution began shipping in early 2003 and went into full production in early fall 2003. The ReVolution offers the Company new market opportunities that the existing, mature products do not have the features to achieve. Additional new products are planned to replace older products and allow for growth through 2004. The Company continues to be focused on further cost reductions through on-going product re-design initiatives by Kontron worldwide mobile design teams. As in 2003, the Company intends to continue funding its own cash needs in 2004 without assistance from Kontron. To be successful, the Company will focus on increased sales and profitability, in addition to working capital management. Kontron has provided the Company with a written agreement to provide financial support to enable the Company to meet its cash flow needs and obligations as and when they become due through December 31, 2004, if necessary. As of June 30, 2004, Kontron controlled approximately 65% of the Company. The Company has a line of credit agreement with Kontron which allows for borrowings of up to 8.5 million Euros for operations ($10.4 million based on June 30, 2004 exchange rate.) Borrowings under this agreement bear interest at 8% per annum (payable monthly). The maturity date of the note is July 1, 2011. Outstanding borrowings under this line of credit were approximately $7.0 million at June 30, 2004. The Company previously had a line of credit with a commercial bank, which it allowed to expire in May 2004. Cash used for operating activities was $1.0 million for the first six months of 2004, compared to cash provided by operating activities of $0.2 in the comparable period in 2003. The increased use of cash was due to an operating loss and increases in accounts receivable as compared to the first six months of 2003. Gross accounts receivable increased to $3.5 million at June 30, 2004 from $2.9 million at December 31, 2003 due to higher revenue in 2004. Accounts payable increased to $1.2 million at June 30, 2004 from $1.1 million at December 31, 2003. Cash used for investing activities was $5,454 and $9,261 relating to purchases of property and equipment during the first six months of 2004 and 2003, respectively. Cash used for financing activities was $196,040 relating to net payments on forward contracts for the first six months of 2004. Cash used for financing activities for the first six months of 2003 was $953,473 consisting of a note repayment of $1,655,349 and $701,876 of net proceeds from forward contracts. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of June 30, 2004 the Company had $7.0 million outstanding on its line of credit from Kontron. This loan bears interest at 8% per annum, payable monthly. Both the principal amount borrowed under the line of credit and interest payable thereunder are payable in Euros. See the earlier discussion under "Foreign Currency Transactions" for a description of the foreign currency forward contract in effect. All remaining transactions of the Company are conducted and accounts are denominated in U.S. dollars. Based on its overall foreign currency rate exposure at June 30, 2004, and in light of the Company's currently effective foreign currency forward contract, the Company does not believe that a hypothetical 10% change in foreign currency rates would materially adversely affect its financial position or results of operations. 10 The Company has no derivative financial instruments or derivative commodity instruments in its cash and cash equivalents. The Company had $0.5 million in cash and cash equivalents at June 30, 2004 compared to $1.3 million at June 30, 2003. Based on analysis, shifts in money market rates would have an immaterial impact on the Company. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including the Company's Chief Executive Officer and President, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and President concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings. Changes in Internal Controls. During our second fiscal quarter, there were no significant changes made in our internal control over financial reporting (as defined in Rule 13(a) - 15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None, ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS An Annual Meeting of Shareholders was held on June 15, 2004. Two items were on the ballot. In the first item, the shareholders voted to elect six directors, each of whom will serve until such director's successor shall have been elected and shall qualify or until such director's earlier death, resignation, removal or disqualification. Management's entire slate of six directors was elected to serve until the next Annual Meeting of Shareholders by the following vote tallies:

In the second item, the shareholders voted to approve an amendment to the 1996 Director's Stock Option Plan to increase the number of shares issuable thereunder from 500,000 to 600,000. The item was approved with 8,308,482 votes for the amendment and 460,068 votes against the amendment. 11 ITEM 5. OTHER INFORMATION On August 6, 2004, Kontron AG announced the successful completion of its tender offer (the "Offer") for all of the outstanding shares of the Company not owned by Kontron AG at a price of $0.55 per share, net in cash. The Offer expired at 5:00 p.m.New York City time on August 6, 2004, at which time approximately 5,507,273 shares had been validly tendered and not withdrawn and an additional 21,000 shares had been tendered pursuant to guaranteed delivery procedures. The shares tendered through August 6, 2004, when combined with the shares already then owned by Kontron AG, represent approximately 91% of the voting securities of the Company. On August 6, 2004, KAC Acquisition, Inc. ("KAC Acquisition"), a wholly owned subsidiary of Kontron AG, accepted all shares validly tendered through such date and not withdrawn for payment. Kontron AG and KAC Acquisition commenced a subsequent offering period on Monday, August 9, 2004, which will expire on Friday, August 20, 2004, at 5:00 p.m.New York City time, unless extended. During the subsequent offering period, KAC Acquisition will accept and promptly pay for all shares as they are tendered. KAC Acquisition will purchase the tendered shares at a price of $0.55 per share. Shares that are tendered during the subsequent offering period may not be withdrawn. After the expiration of the subsequent offering period, Kontron AG has indicated that KAC Acquisition will acquire the shares of the Company that were not tendered through a "short-form" merger (the "Merger"). Under the Minnesota Business Corporation Act, KAC Acquisition, as the holder of more than 90% of the voting securities of the Company, may cause the Company to merge with and into KAC Acquisition without a vote of the Company's shareholders. In the Merger, the remaining shareholders of the Company, other than those who assert dissenters rights, will have their shares converted into the right to receive $0.55 per share. As a result of the Merger, the Company will become a wholly owned subsidiary of Kontron AG. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 3.1 Second Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement filed on Form S-1, File No. 333-18335) Exhibit 3.2 Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.4 to the Company's Registration Statement filed on Form S-1, File No. 333-18335) Exhibit 3.3 Articles of Merger amending the Company's Articles of Incorporation effective June 4, 2001 (incorporated by reference to the exhibit 3.1 filed with the Company's Report on Form 8-K filed June 4, 2001) Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 32.2 Certification of President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 12 (b) Reports on Form 8-K: The Company filed an 8-K dated May 17, 2004 reporting under Item 7 ("Financial Statements and Exhibits") and Item 12 ("Results of Operations and Financial Condition"), a press release announcing the Company's financial results for the first quarter ended March 31, 2004. The Company filed an 8-K dated June 16, 2004 reporting under Item 5 ("Other Events"), a press release dated June 15, 2004 announcing that its majority shareholder has commenced a tender offer to purchase all of the shares of common stock of the Company that are not currently owned by Kontron AG at a purchase price of $0.55 per share of the Company's common stock. 13 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KONTRON MOBILE COMPUTING, INC. Date: August 10, 2004 /s/ Thomas Sparrvik ----------------------------------- Thomas Sparrvik, Chief Executive Officer (principal executive officer) 14

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