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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
   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 31, 2003 OR o
    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,
    
    55344Eden 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 exchangeTitle of each class
    
    on which registeredNone
    
    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 o 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. x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
o No x 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 as of
June 30, 2003 (i.e., the last business day of the Registrants most recently
completed second fiscal quarter), as reported on the Over The Counter Bulletin
Board, was approximately $1,952,344. 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 1, 2004 was 14,952,926. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Registrants 2004 Annual Meeting of
Shareholders to be held June 15, 2004 are incorporated by reference in Part
III.




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TABLE OF CONTENTS  PART IITEM 1. BusinessRISK FACTORSITEM 2. PropertiesITEM 3. Legal ProceedingsITEM 4. Submission of Matters to a Vote of Security HoldersITEM 5. Market for Registrants Common Equity and Related Stockholder MattersITEM 6. Selected Financial DataITEM 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 7A. Quantitative and Qualitative Disclosures About Market RiskITEM 8. Financial Statements and Supplementary DataITEM 9. Changes In and Disagreements With Accountants On Accounting and Financial DisclosureItem 9A. Controls and ProceduresPART IIIITEM 10. Directors and Executive Officers of the RegistrantITEM 11. Executive CompensationITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersITEM 13. Certain Relationships and Related TransactionsITEM 14. Principal Accountant Fees and ServicesPART IVITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-KSIGNATURESINDEX TO EXHIBITSBALANCE SHEETSSTATEMENTS OF OPERATIONSSTATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)STATEMENTS OF CASH FLOWSNOTES TO FINANCIAL STATEMENTSREPORT OF INDEPENDENT AUDITORSSCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS2004 Compensation Plan for Thomas Sparvik2004 Compensation Plan for Dale R. SzymborskiCompensation Agreement with Dale R. SzymborskiConsent of Boulay, Heutmaker, Zibell & Co. PLLPConsent of Deloitte & Touche LLPNotice Regarding Consent of Arthur Andersen LLPCertification of CEO Pursuant to Section 302Certificaiton of President Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of President Pursuant to Section 906    Table of Contents  
 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 AG (Kontron). Over
the past several years, the Company has evolved its strategy to focus on
designing and providing industry-specific field technology solutions to end
users and original equipment manufacturers (OEMs). The Company believes that
this focus represents the strongest opportunity for growth and differentiation. The Company has a history of designing and delivering hardware platforms
and technologies for extreme environments and will continue to capitalize on
its strong product reputation. The Companys focus will be on markets that
require rugged computers and rugged computing technologies for harsh
environment applications. 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
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 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. Longer product life
sets the Companys products and solutions higher on the value scale with
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 smart phones, 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 to
information through computerization. Enterprise-wide networking can provide
sophisticated field diagnostic and analytic capabilities, enhance field access
to data and on-line information, eliminate paperwork, improve communication and
reduce costs. The markets for the Companys products consist of those businesses, armed
forces, national and local governmental agencies and other entities that are
seeking reliable 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 which include: (i) public service and field
service organizations for improved productivity, efficiency and real time,
remote data access (ii) military and government contractors and OEMs 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 is to become the worldwide
rugged-mobile-computing platform and technology provider for OEMs and solution
providers in niche markets. 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,
utilities and other field service organizations. 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, mobile computing and communication applications through
the partnership with value-added resellers and OEMs. 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 the strategy of maintaining rugged mobile design strength at
the architectural level, while utilizing inter-company resources to reduce
costs and add incremental expertise. This change has been well received by the
Companys customers and value-added 2




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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. Products.The Companys products are rugged mobile computers designed and
manufactured for field applications, including data acquisition, mobile data
processing and 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 2003, the
Company introduced enhancements to existing product lines: an enhanced EnVoy
with a Kontron-designed faster CPU module, the FieldWorks 8500 (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. As a
new strategy, the Company plans to take existing technologies and sell them to
OEM opportunities. An OEM focus potentially gives the Company recurring
revenue over a longer period of time to help reduce uneven quarterly revenues
the Company has experienced in previous years. ReVolution: The Company expended significant personnel resources during
2002-2003 to develop the ReVolution, a rugged, convertible, notebook computer.
This product marks the re-entry of the Company into the rugged notebook market,
following cessation of production of the FW5000 in fiscal year 2000. The
ReVolution is based on a custom CPU module developed jointly by the Company and
a Kontron affiliate in Taiwan. The introduction of the ReVolution creates a
new category of computing devices for the Company. The ReVolution is a fully
Windows-capable computer that converts from notebook to tablet with a quick
flip of the rugged, 180-degree display hinge, with the added benefits of
ruggedness, upgradability and integrated wireless communication features. The
ReVolutions full magnesium construction design is tested to U.S. military and
NEMA standards for resistance to shock, vibration, water, temperature and dust.
The ReVolution is targeted to commercial and industrial markets that include
utilities, telecommunications, government, military, and other areas requiring
rugged mobile computers in field service applications. The Company began
shipping ReVolution in March 2003. Production is handled by one of the Kontron
affiliates in Taiwan, with final test, custom integration and repair being
performed by the Company. The Company retains exclusive rights to market and
sell the ReVolution in North America. Kontron has the exclusive rights to
market and sell ReVolution in all other countries. FieldWorks 8000 Series: The FieldWorks 8000 (FW8000) 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. The FW8000 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 slot, integrated AC/DC
power supply, uninterruptible power supply capability, full-length desktop
ISA/PCI expansion card slots, integrated CD-ROM, CD-RW and floppy diskette
drives, and several optional features such as dual removable hard drives,
Sunlight Readable display and XGA display options. The FW8000 is the Companys
flagship product. The FW8500, introduced in 2002, provides six PCI card slots, a minimum of
1.06Ghz CPU using the Intel Pentium III M processor, up to 640MB of RAM, a 40GB
or 60GB hard drive (1 or 2 drives), and RAID 0 or 1 support for the two hard
drive configuration. This product targets FW8000 class customers who are
moving their applications to all PCI hardware and who need much faster
processor speeds. An introduction of faster processors for the FW8500 is
planned for 2004. 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 customer-specific
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 the Envoy is public services (Police, Fire, EMS and
Utility). EnVoy models introduced in 2002 provide faster processing, increased
memory, greater storage capacity and heated hard drives for extended
temperature operation. Other enhancements to the EnVoy product line include a
1200-nit 10.4" and 1400-nit 12.1" 1400-nit display with touch screen. FieldWorks 2000 Series Mobile Data Server (MDS): The FieldWorks 2000
Series MDS was developed for mission critical communication applications. The
FieldWorks 2000 Series MDS 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 3




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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. Power Lite: The Power Lite is similar to the FW8000 and FW8500, 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. 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. This product is no longer available for sale in 2004. 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 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, 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. Manufacturing.The Company initiated the outsourcing of some of its
manufacturing activities to Kontron affiliates during 2001. This has improved
inventory management, reduced product and production costs, and enhanced
product quality. Further outsourcing may occur as opportunities to reduce costs
and improve product quality are identified. The FW8000 Series assembly, all
platform repair and final integration work continue to be performed at the
Company. Kontron manufactures parts for the EnVoy MDS and the FieldWorks 2000
Series MDS in Germany, with final assembly performed at the Company. The Power
Lite and Field Lite are manufactured in Germany by Kontron. 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 August 2003 to the ISO 9001:2000 standard. 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. No customers represented greater than 10% of net sales in 2003. Sales to
the United States Army represented 15% of net sales in 2002 and 28% of net
sales in 2001. 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. 4




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Sales by geographic locations were as follows: 2003
    
    2002
    
    2001United States
    
    $
    10,667,000
    
    
    $
    10,595,000
    
    
    $
    14,875,000Europe
    
    
    790,000
    
    
    
    855,000
    
    
    
    1,865,000Americas (excluding United States)
    
    
    464,000
    
    
    
    574,000
    
    
    
    301,000Asia
    
    
    59,000
    
    
    
    184,000
    
    
    
    118,000Other
    
    
    
    
    
    
    17,000
    
    
    
    147,000$
    11,980,000
    
    
    $
    12,225,000
    
    
    $
    17,306,000
 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.; DRS, Inc.; Motorola, Inc.; Data 911;
Northrup Grumman; and Panasonic Personal Computer Company. The Company believes
its primary competitive factors relate to product design and feature
differentiation, product pricing, functionality, product dimensions, technology
enhancements and responsiveness to customer requirements. 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, tablet 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 Company plans to focus more of its own resources in developing
new products in 2004 and continue to build its research and development
competency. Research and development expenses were $1.1 million in 2003, $1.0
million in 2002 and $1.2 million in 2001. 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, ReVolution, Kontron and the Kontron Logo. The
Company has federal trademark registrations with respect to Field MousePad,
Field WorkStation, Technology Module and FieldWorks, Inc. and Design. 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 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. The Company 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 31, 2003, the Company employed 42 full-time
employees and 3 part-time employees, of whom 19 were engaged primarily in
operations, 11 were engaged primarily in sales and marketing, 9 were engaged
primarily in engineering and research and development, and 6 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. Available Information.Our website is: http://www.kontronmobile.com. We
make available, free of charge, through our Website our Annual Report on Form
10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) of the
Securities and Exchange Act of 1934, as amended 5




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(the Exchange Act), as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission (the SEC). 
 RISK FACTORS Kontron Mobile Computing, Inc. (we or us), or persons acting on our
behalf, or outside reviewers we have retained who are making statements on our
behalf, or underwriters, from time to time, may make, in writing or orally,
forward-looking statements as defined under the Private Securities Litigation
Reform Act of 1995 (the Act) and incorporated in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. This Cautionary Statement is for the purpose of
qualifying for the safe harbor provisions of the Act and is intended to be a
readily available written document that contains factors which could cause
results to differ materially from those projected in the forward-looking
statements. These factors are in addition to any other cautionary statements,
written or oral, which may be made or referred to in connection with any
forward-looking statement. The following matters, among others, may have a material adverse effect on
our business, financial condition, liquidity, results of operations or
prospects, financial or otherwise. Reference to this Cautionary Statement in
the context of a forward-looking statement shall be deemed to be a statement
that any one or more of the following factors may cause actual results to
differ materially from those that we have projected, forecast, estimated or
budgeted in any forward-looking statement or statements: Risks Related to Our Operations We have a history of losses. As of December 31, 2003, we had an
accumulated deficit of $36.3 million. Although we achieved net income in 2003
for the third year in a row, we expect to continue to incur significant
operating expenses and, as a result, will need to generate significant revenues
to sustain profitability, which may not occur. Even if we do sustain
profitability, we may be unable to increase profitability on a quarterly or
annual basis in the future. Our ability to increase revenues and achieve
sustained profitability and positive cash flow over the next several years will
depend primarily upon market acceptance of, and achievement of material sales
from, new products, including the ReVolution, of which there can be no
assurance. We
cannot assure you that we will generate sufficient sales to allow us to
continue to operate profitably. The market for the kind of computing platforms
and solutions we sell is limited. The rugged computing platforms that we use
are both heavier and more expensive than most consumer portable personal
computers. Our success will depend upon our ability to expand the tools and
services we offer, penetrate our key vertical markets of government, military,
public services, utilities, and other field service organizations, and continue
our reduction in product costs and time to market. We cannot assure you that
our current or new products will gain widespread acceptance or that we will
generate sufficient sales to allow us to continue to operate profitably. We
will in particular suffer adverse effects if the market for the kind of
computing solutions and products we sell declines. Our
ability to develop solutions around our rugged platforms will
influence our ability to compete in the marketplace. We have had a history of
designing and delivering hardware platforms for extreme environments and will
continue to capitalize on this strategy. The Companys strategy is to be a key
provider of tools and services to facilitate field data acquisition, test and
measurement, telemetry, mobile computing and communication applications through
the partnership with value-added resellers and OEMs. To produce these
solutions, we combine appropriate hardware, software and peripherals and also
provide service and support. To succeed with this approach, we will need to
design, develop, conceptualize and support computing solutions that address the
needs of these vertical markets. We cannot guarantee that we will be able to
do this in a timely, cost-effective manner or that our target markets will
accept the solutions that we do introduce. We depend on third-party manufacturers to produce some of our products.
We depend on third-party manufacturers, some of whom are located outside the
United States, to manufacture and assemble some of our products. For example,
our newest product, ReVolution, is being manufactured in Taiwan. This reliance
on third-party manufacturers results in dependence on the timely delivery of
high quality products from these manufacturers and may leave us with less
flexibility and control over the manufacturing process than if we conducted all
of these operations internally. These manufacturers (including the
manufacturers of subassemblies included in our final products) may not timely
deliver the items they are expected to produce. Any occurrence of this sort
could compromise our ability to deliver our products and solutions in a timely
fashion. It could also require us to make alternative arrangements, which
might not be available on acceptable terms or on a timely basis. If we were
unable to make alternative arrangements, our business and financial condition
could suffer. Our
failure to anticipate or rapidly respond to changing customer demands
could adversely affect our market position. Both the computer industry and the
diagnostic and data collection instrument industry are characterized by rapid
technological change, including changes in customer requirements, frequent new
product introductions and enhancements, and evolving industry 6




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standards. Our success will depend in part on our ability to keep pace
with technological developments and emerging industry standards and to respond
to customer requirements by enhancing our current products and developing and
introducing new solutions and products. Our market position will be adversely
affected if we do not adequately anticipate or rapidly respond to changes of
this type. Technological advances may also increase the level of competition
in our market niche. Intense
competition could reduce our market share and harm our financial
performance. We occupy a niche in the portable computer market. In this
niche, our products face direct competition from companies producing portable
computers intended for field use such as Dolch Computer Systems; Getac Corp.;
Itronix Corp.; DRS, Inc.; Motorola, Inc.; Data 911; Northrup Grumman; and
Panasonic Personal Computer Company. Our computing platforms also face indirect
competition from a variety of different companies and products, including
consumer portable personal computers, customized portable personal computers,
tablet personal computers and single-purpose diagnostic and data collection
instruments. Both the computer industry and the diagnostic and data collection
instrument industry are intensely competitive. To the extent that we and our
current direct competitors expand and develop the market niche that we
currently service, other manufacturers may turn their attention to it and begin
to produce products directly competitive with those we offer. Many of the
companies that produce or may produce devices that compete or may compete,
directly or indirectly, with ours have greater name recognition, larger client
bases and substantially more financial, technological and marketing resources
than we do. These factors may provide them with significant advantages over
us. Among other things, these factors may allow them to adapt more rapidly and
effectively to changes in technology or in the market or to develop or market
products that will be more widely accepted. Competitive pressures could result
in reduced market share, price reductions, reduced margins and increased
spending on marketing and product development, any of which could adversely
affect our business. If we do not adequately manage our inventory we may be required to make
write-offs in the future. In the past, we have written off portions of our
parts inventory that have become obsolete. If our current policies aimed at
preventing a recurrence prove ineffective, we may be required to do so again.
Any significant future write-offs could have an adverse effect on our financial
condition. We
may not succeed in attracting and retaining the personnel we need for
our business. Our future success depends substantially on our ability to
attract and retain the personnel we need for our business. Our personnel needs
include highly trained personnel for management, sales and engineering. We may
not succeed in attracting and retaining the personnel we need for our business. Adverse events with respect to our international sales could have an
adverse effect on our business and financial condition. In the year ended
December 31, 2003, international sales represented approximately 11% of our net
sales. All of our export sales are currently denominated in United States
dollars. Changes in the value of the United States dollar relative to foreign
currencies could have an effect on our competitiveness in foreign markets. In
the future, if we were to denominate our export sales in foreign currencies,
our financial condition and results of operations would become subject to
foreign currency translations and the possibility of currency exchange or price
controls or other restrictions on foreign currencies. If any of these events
occurred, it could have an adverse effect on our business and financial
condition. We depend on resellers for our product distribution. We distribute a
portion of our products through independent sales representatives and
distributors. We also sell our products to value-added-resellers (known as
VARs) and systems integrators. Our success depends in large part upon the
performance of these resellers and on our ability to attract new resellers.
Many of our resellers also carry  and may have incentives to encourage
purchase of  competitive products. Most of our resellers may terminate their
written agreements with us with or without cause by giving us 30 days written
notice. The loss of any of our major resellers or a failure to make acceptable
arrangements with resellers in new markets could have a material adverse effect
on us. We obtain a number of our components from single sources. Our rugged
computing platforms employ a number of components not generally used in
off-the-shelf personal computers, such as special hard disk drives, CD-ROM
drives, floppy disk drives, displays and power supplies. We currently obtain a
number of these components from single sources. It could create uncertainty
and be costly and time-consuming if we had to change suppliers. If we could
not obtain adequate or timely quantities of necessary components from our
current suppliers, we might not be able to identify or access alternative
sources within a reasonable period of time, on acceptable terms, or at all.
Some of our current vendors use tools that have been designed for us and are
our property. If we were required to change suppliers for these components, we
would need either to move the necessary tools or to obtain new tools, either of
which could entail significant cost and delay. Moreover, our small volume may
limit our buying power and we may receive less favorable allocations and other
terms such as price, timing or other factors than larger companies buying from
the same suppliers. Any of these factors or a significant increase in the
price of components could have a material adverse effect on our ability to
manufacture and market our products. 7




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Potential fluctuations in our quarterly financial results make financial
forecasting difficult. Our quarterly operating results may fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside our control. These factors include:  
    
    long customer sales cycles (especially for customers that are government agencies or large corporations);
    
    changes in customer buying patterns;
    
    orders from significant customers in one quarter that are disproportionate in size or value compared to our other orders;
    
    the timing and nature of customer returns;
    
    the timing of the introduction of new products by us or our competitors;
    
    our competitors tactics;
    
    technological developments; and
    
    the overall strength of the economy. All of these factors, along with the uncertainties associated with the
introduction of any new product or product enhancement, in gauging ultimate
customer demand, and in predicting general trends in the market for our tools
and services, may limit our ability to plan for production and to forecast
quarterly results of operations accurately. We believe that quarter-to-quarter
comparisons of our operating results may not be a good indication of our future
performance. Stockholders should not rely on our operating results for any
particular quarter as an indication of our future operating results. Risks Related to Intellectual Property Failure to protect our intellectual property rights could harm our brand
and our ability to compete effectively. We rely on a combination of unpatented
trade secrets and know-how and on the expertise of our employees. We do not
rely on patented processes or technologies. The protective steps we have taken
may be inadequate to deter misappropriation of our proprietary information. We
may be unable to detect the unauthorized use of, or take appropriate steps to
enforce, our intellectual property rights. Effective trade secret protection
may not be available in every country in which we offer or intend to offer our
products and services. Likewise, others may independently develop or otherwise
acquire unpatented and/or patented technologies or products similar or superior
to ours. We claim trademark rights in four marks we use in connection with our
products in the United States. We are aware that there are third parties that
have claimed or may claim superior rights, in some U.S. territories, to use
marks in which we claim rights. One or more of these third parties may contest
our right to use or register our trademarks. We do not know whether any of the
trademarks covered by our applications for registration will be found
registrable, that registrations will issue, or that we can support the cost of
defense of our trademarks. Failure to protect our intellectual property
adequately could harm our brand and affect our ability to compete effectively.
Defending our intellectual property rights could also result in the expenditure
of significant financial and managerial resources, which could materially
adversely affect our business. Loss of software licenses could have an adverse effect on us. We license
some of the software that we include in our products from third parties. If
any licensor terminated any of these licenses, we might not be able to license
similar software from another party in a timely fashion, on acceptable terms,
or at all. We may have to defend against intellectual property infringement claims,
which could have an adverse effect on us whether or not we prevailed. Disputes
over intellectual property are frequent in the high technology area. Although
we believe that our business activities do not infringe the intellectual
property rights of others, other parties may assert infringement claims against
us or claim that we have violated a patent or other proprietary right belonging
to them. Likewise, disputes may arise in the future with respect to ownership
of technology developed by employees who were previously employed by other
companies. Infringement claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources. An adverse
determination could subject us to significant liabilities, require us to seek
licenses from or pay royalties to third parties or require us to develop
appropriate alternative technology. We might not be able to do any of these
things on acceptable terms, at an acceptable price, or at all. Any of these
results could materially adversely affect our business. 8




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##### Table of Contents



Risks Related to Our Financial Condition A
transaction with Kontron AG in response to its offer to acquire the
shares of the Companys common stock it does not already own may not be
consummated. On December 3, 2003, the Company announced that it had received an
offer from Kontron AG expressing the interest of Kontron AG to acquire all of
the shares of the Companys common stock not currently owned or controlled by
Kontron AG. Kontron AG offered to pay $0.45 per share of common stock. The
Companys board of directors has formed a special committee comprised solely of
independent directors to review the offer from Kontron AG. On January 8, 2004,
the Company announced that the special committee hired Stonehill Group, LLP as
its financial adviser. Fredrikson & Byron, P.A., serves as legal counsel to the
special committee. The special committee is continuing to work with its
financial and legal advisers to evaluate and assess Kontron AGs offer.
There can be no assurance, however, that a transaction with Kontron AG ultimately will be consummated. In addition, the Company and
the special committee continue to incur expenses for legal, financial and
accounting advisers which are required to be paid by the Company whether or not
a transaction is consummated. Our
Common Stock was delisted by Nasdaq and currently is traded on the
Over The Counter Bulletin Board. In August 2000, our Common Stock was delisted
from the Nasdaq SmallCap Market for failure to demonstrate sustained compliance
with the net tangible assets listing requirement, and began trading on the Over
The Counter Bulletin Board. There can be no assurance that our Common Stock
will continue to meet the requirements required for listing on the Over The
Counter Bulletin Board or that our Common Stock will continue to be publicly
traded. We may need to raise additional cash during 2004 but may not be able to do
so. Kontron has agreed to provide us financial support to enable us to meet
our cash flow needs and obligations as and when they become due through the
twelve-month period ended December 31, 2004. We also have a line of credit in
place with an existing bank to fund potential cash requirements in excess of
our current cash flow projection, if necessary. Nevertheless, we may need to
raise additional capital. We may not be able to access sufficient capital when
required on favorable terms, if at all. If we raise additional funds by
issuing equity securities, existing shareholders may experience dilution in
their ownership interest. If we raise additional funds by issuing debt
securities, we may incur significant interest expense and become subject to
covenants that could limit our ability to operate and fund our business. If we
cannot obtain additional funds when required, we may be unable to realize our
current plans and may even be forced to cease operations. Our loan agreements with Kontron are valued in Euros and our foreign
currency forward contract may negatively impact our cash flow. In 2001, we
began utilizing foreign currency forward contracts to protect against
significant fluctuations in net income (loss) caused by the valuation of our
loan agreement with Kontron. Our 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. Depending on the currency fluctuation of the United States dollar to
the Euro, we either pay cash or receive cash when we mark-to-market each
quarter. In 2003 and 2002, the Company received net proceeds from our forward
contract of $1,217,496 and $793,300, respectively. If the United States dollar
regains strength against the Euro, a portion of this amount or potentially more
than this amount, may have to be re-paid when the forward contract is settled
in future quarters. The uncertainty of the fluctuation of the United States
dollar to the Euro could cause cash flow problems. Risks Related to Our Corporate Structure One of our shareholders owns a significant percentage of our outstanding
stock and by virtue of that ownership and various contractual rights has
significant influence over our operations and strategic direction. Kontron
owns approximately 65% of our Common Stock, assuming conversion of our
outstanding shares of Preferred Stock. In addition, two designees of Kontron
currently serve on our Board of Directors. Kontrons majority ownership stake
gives Kontron the ability to control the outcome of votes of our shareholders,
and therefore results in Kontron having significant influence on our operations
and strategic direction. Kontrons ownership may also have the effect of
delaying, deterring or preventing a change in control or a change in the
composition of our Board of Directors. Our
charter documents and Minnesota law may discourage a takeover of our
Company. Provisions of our articles of incorporation, bylaws and Minnesota law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our shareholders. We do not intend to pay dividends. We currently intend to retain any
earnings for use in the operation and expansion of our business and therefore
do not anticipate paying any cash dividends in the foreseeable future. 9




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ITEM 2. Properties 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. As of August 2002, the sublessee in the larger space notified the Company
that it was unable to meet its full rent obligation. The Company agreed to
accept a demand promissory note for each month that the sublessee paid short,
bearing simple interest at the rate of 12% per annum, compounded monthly. On
December 11, 2003, the Company and the sublessee entered into a lease
amendment. Under the terms of the amendment, the sublessee paid the Company
$70,000 and the Company accepted this as full payment of all previous
promissory notes and accrued interest on those notes, forgiving $56,023 in
promissory notes through November 30, 2003. The Company agreed to accept
reduced rent for December 2003 through March 2004 in full payment for those
periods and the sublessee is not obligated to pay any additional rent beyond
March 31, 2004. The Company will give the sublessee at least 60 days notice to
vacate its current space, but would allow the sublessee to continue occupying
its current premises on a rent-free basis through the duration of the original
lease agreement if the Company should not require the space. In light of the anticipated expiration of its current lease in November
2004, the Company is currently reviewing options for potential new facilities
in 2004. 
 ITEM 3. Legal Proceedings The Company is not involved in any pending legal proceedings. 
 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 31, 2003. 
 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. First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth Quarter2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002Price range of common stock:High
    
    $
    .40
    
    
    $
    .83
    
    
    $
    .51
    
    
    $
    .82
    
    
    $
    .37
    
    
    $
    .70
    
    
    $
    .60
    
    
    $
    .48Low
    
    
    .30
    
    
    
    .60
    
    
    
    .28
    
    
    
    .55
    
    
    
    .29
    
    
    
    .35
    
    
    
    .32
    
    
    
    .27
 Shareholders.As of March 1, 2004, there were 136 holders of record of
the Companys Common Stock. The Company believes that the actual number of its
beneficial shareholders is significantly higher than the number of record
holders, since a portion of our common stock is held in street name. Dividends.The Company has not paid any cash dividends since inception and
does not anticipate paying cash dividends in the foreseeable future. 10




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ITEM 6. Selected Financial Data  Selected Statements of Operations Data:(in thousands, except per share amounts) Year EndedDecember 31,
    
    December 31,
    
    December 30,
    
    December 31,
    
    January 2,2003
    
    2002
    
    2001
    
    2000
    
    2000Net sales
    
    $
    11,980
    
    
    $
    12,225
    
    
    $
    17,306
    
    
    $
    15,696
    
    
    $
    25,329Cost of sales
    
    
    6,876
    
    
    
    6,695
    
    
    
    9,487
    
    
    
    17,390
    
    
    
    17,950Gross profit (loss)
    
    
    5,104
    
    
    
    5,530
    
    
    
    7,819
    
    
    
    (1,694
    )
    
    
    7,379Operating expenses:Sales and marketing
    
    
    1,919
    
    
    
    2,293
    
    
    
    2,747
    
    
    
    4,413
    
    
    
    5,633General and administrative
    
    
    1,236
    
    
    
    1,187
    
    
    
    1,740
    
    
    
    3,949
    
    
    
    2,998Research and development
    
    
    1,010
    
    
    
    1,040
    
    
    
    1,205
    
    
    
    4,213
    
    
    
    3,414Product upgrade and restructuring costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    502
    
    
    
    400Total operating expenses
    
    
    4,255
    
    
    
    4,520
    
    
    
    5,692
    
    
    
    13,077
    
    
    
    12,445Operating income (loss)
    
    
    849
    
    
    
    1,010
    
    
    
    2,127
    
    
    
    (14,771
    )
    
    
    (5,066
    )Gain (loss) on foreign currency
    
    
    (141
    )
    
    
    (169
    )
    
    
    208
    
    
    
    
    
    
    
    Interest expense, net
    
    
    (531
    )
    
    
    (692
    )
    
    
    (1,275
    )
    
    
    (1,765
    )
    
    
    (317
    )Other income (expense), net
    
    
    
    
    
    
    
    
    
    
    (120
    )
    
    
    (641
    )
    
    
    3Net income (loss)
    
    
    177
    
    
    
    149
    
    
    
    940
    
    
    
    (17,177
    )
    
    
    (5,380
    )Beneficial conversion feature applicable to preferred
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (521
    )
    
    
    Net income (loss) applicable to common shareholders
    
    $
    177
    
    
    $
    149
    
    
    $
    940
    
    
    $
    (17,698
    )
    
    $
    (5,380
    )Basic and diluted loss per common share:Net income (loss) per common share
    
    $
    .01
    
    
    $
    .01
    
    
    $
    .06
    
    
    $
    (1.92
    )
    
    $
    (.61
    )Basic weighted average common shares outstanding
    
    
    14,953
    
    
    
    14,953
    
    
    
    14,945
    
    
    
    9,241
    
    
    
    8,874Diluted weighted average common shares outstanding
    
    
    20,422
    
    
    
    20,422
    
    
    
    15,029
    
    
    
    9,241
    
    
    
    8,874
  Selected Balance Sheet Data:(in thousands) December 31,
    
    December 31,
    
    December 30,
    
    December 31,
    
    January 2,2003
    
    2002
    
    2001
    
    2000
    
    2000Cash and cash equivalents
    
    $
    1,694
    
    
    $
    2,031
    
    
    $
    2,074
    
    
    $
    553
    
    
    $
    87Working capital (deficit)
    
    
    3,472
    
    
    
    3,373
    
    
    
    (4,382
    )
    
    
    (5,851
    )
    
    
    1,829Total assets
    
    
    6,270
    
    
    
    6,416
    
    
    
    6,916
    
    
    
    7,475
    
    
    
    12,014Notes payable, net
    
    
    7,104
    
    
    
    7,462
    
    
    
    6,938
    
    
    
    5,881
    
    
    
    2,228Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    80Total debt
    
    
    7,104
    
    
    
    7,462
    
    
    
    6,938
    
    
    
    5,920
    
    
    
    2,308Accumulated deficit
    
    
    (36,264
    )
    
    
    (36,441
    )
    
    
    (36,589
    )
    
    
    (37,530
    )
    
    
    (19,832
    )Total shareholders equity (deficit)
    
    
    (3,692
    )
    
    
    (3,869
    )
    
    
    (4,018
    )
    
    
    (4,985
    )
    
    
    1,403
 
 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. 11




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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 EndedDecember 31,
    
    December 31,
    
    December 30,2003
    
    2002
    
    2001Net sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of sales
    
    
    57
    
    
    
    55
    
    
    
    55Gross profit
    
    
    43
    
    
    
    45
    
    
    
    45Operating expenses:Sales and marketing
    
    
    16
    
    
    
    19
    
    
    
    16General and administrative
    
    
    11
    
    
    
    10
    
    
    
    10Research and development
    
    
    9
    
    
    
    8
    
    
    
    7Total operating expenses
    
    
    36
    
    
    
    37
    
    
    
    33Operating income
    
    
    7
    
    
    
    8
    
    
    
    12Gain (loss) on foreign currency
    
    
    (1
    )
    
    
    (1
    )
    
    
    1Interest expense, net
    
    
    (4
    )
    
    
    (6
    )
    
    
    (7
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    (1
    )Net income applicable to common shareholders
    
    
    2
    %
    
    
    1
    %
    
    
    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 to link field workers into corporate information systems. Customers are
demanding more functionality for less money due to recent short-term decreases
in capital spending among public safety, military and private field forces
worldwide. The Company expects the market for ruggedized computers to grow in
2004 where total-cost-of-ownership studies have proved the value of rugged
platforms used in the field is significantly higher then consumer grade
notebooks, with OEM customers being the highest growth segment for the Company.
Increased spending in telecommunications, military, homeland defense are
driving the need for rugged building blocks that the Company can provide to
large OEM solution providers. Off Balance Sheet Arrangements and Contractual Obligations.The
following table summarizes the Companys future estimated cash payments under
existing contractual obligations, including payments due by period. All
current contractual obligations are related to operating leases. See
discussion under Note 7, Commitments and Contingencies. Payments due by periodLessthan 1
    
    1-3
    
    3-5
    
    More thanContractual Obligations
    
    Total
    
    year
    
    years
    
    years
    
    5 yearsLong-Term Debt
    
    $
    7,103,910
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,103,910Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Leases
    
    
    449,000
    
    
    $
    449,000
    
    
    
    
    
    
    
    
    
    
    
    Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term
Liabilities Reflected on
the Registrants Balance
Sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    7,552,910
    
    
    $
    449,000
    
    
    
    
    
    
    
    
    
    
    $
    7,103,910
 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 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 12




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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. 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, 101B and 104. 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
generally recognizes revenue upon shipment of its products. In certain limited
situations, at the customers written request, the Company enters into bill and
hold transactions whereby title transfers to the customer, but the product does
not ship until a specified later date. The Company recognizes revenues
associated with bill and hold arrangements when the product is complete, ready
to ship, and all bill and hold revenue recognition criteria have been met.
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, as amended. Inventories. Inventories are stated at the lower of cost, as determined by
the first-in, first-out cost method, or market value. The Companys inventory
monitoring controls reduce the potential for write-downs of inventory due to
obsolescence; however, there can be no assurance that future inventory
write-downs will not be required. Inventory is coded to reflect the product
for which it is primarily used, allowing the Company to better manage its
inventory and to assist in making forecast updates. The Company reviews its inventory quantities on hand quarterly and records
a provision for estimated obsolescence or unmarketable inventory based upon
usage and assumptions about future demand and market conditions. 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 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 under warranty. 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 $0.9 million in 2003, $1.1 million in 2002, and
$1.3
million in 2001. The Company also buys products from these related
entities for further resale within North America. These purchases were
approximately $4.2 million in 2003, $2.0 million in 2002, and 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. Included in the financial statements are approximately $185,000 and
$119,900 of related party receivables and approximately $959,600 and $412,400
of related party payables as of December 31, 2003 and December 31, 2002,
respectively. The Company has a credit line agreement with Kontron to provide up to 8.5
million Euros for operations ($10.6 million 13




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##### Table of Contents



based on December 31, 2003 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 $7.1 million at
December 31, 2003 and approximately $7.5 million at December 31, 2002. Refer
to the Liquidity and Capital Resources section for further discussion. On December 3, 2003, the Company announced that it had received an offer
from Kontron AG expressing the interest of Kontron AG to acquire all of the
shares of the Companys common stock not currently owned or controlled by
Kontron AG. Kontron AG offered to pay $0.45 per share of common stock. The
Companys board of directors has formed a special committee comprised solely of
independent directors to review the offer from Kontron AG. On January 8, 2004,
the Company announced that the special committee hired Stonehill Group, LLP as
its financial adviser. Fredrikson & Byron, P.A., serves as legal counsel to the
special committee. The special committee is continuing to work with its
financial and legal advisers to evaluate and assess Kontron AGs
offer. There can be no assurance, however, that a transaction with Kontron AG
ultimately will be consummated. In addition, the Company and
the special committee continue to incur expenses for legal, financial and
accounting advisers which are required to be paid by the Company whether or not
a transaction is consummated. 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;
however, it requires additional footnote disclosures. 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 years ended December 31, 2003 and 2002: Aggregate Changes inAggregate
    
    the Liability forReductions in the
    
    Accruals Related to
    
    Aggregate Changes inLiability for
    
    Product Warranties
    
    the Liability for AccrualsBeginning
    
    Payments Made
    
    Issued During the
    
    Related to Pre-Existing
    
    EndingYear
    
    Balance
    
    Under the Warranties
    
    Reporting Periods
    
    Warranties
    
    Balance2003
    
    $
    332,169
    
    
    $
    (135,828
    )
    
    $
    135,828
    
    
    $
    (129,169
    )
    
    $
    203,0002002
    
    
    332,169
    
    
    
    (170,084
    )
    
    
    170,084
    
    
    
    
    
    
    
    332,169
 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 14




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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: 2003
    
    2002
    
    2001Net income, as reported
    
    $
    177,246
    
    
    $
    148,722
    
    
    $
    940,359Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards
    
    
    (231,579
    )
    
    
    (265,274
    )
    
    
    (29,642
    )Pro forma net income (loss)
    
    $
    (54,333
    )
    
    $
    (116,552
    )
    
    $
    910,717Net income (loss) per share:Basic and diluted  as reported
    
    $
    .01
    
    
    $
    .01
    
    
    $
    .06Basic and diluted  pro forma
    
    
    
    
    
    
    (.01
    )
    
    
    .06
 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. COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002 Net Sales.Net sales for 2003 were $12.0 million, a decrease of $0.2
million or 2% from 2002 net sales of $12.2 million. Unit volumes of the 8000
Series represented 29% of total units in 2003 compared to 52% in 2002. The
decrease is due to reduced demand for the product. Unit volumes of the EnVoy
product represented 38% of total units in 2003 compared to 14% in 2002. The
increase in sales was attributable to two large orders with Visteon and Jackson
County, Michigan Sheriffs department in 2003 with no comparable large orders
in 2002. Unit volumes of ReVolution presented 19% of total units in 2003. The
Company began shipping the ReVolution in March 2003 so year-over-year figures
are not available. Sales of the 2000 Series Mobile Data Server represented 11%
of total units in 2003 compared to 22% in 2002. The decrease in sales was
attributable to a large United States Army order in 2002 with no comparable
large orders in 2003. Revenue for the E-Tool
product included development fees. Combined unit volumes of the Field
Lite, Power Lite and IN Rave represented 4% of total units in 2003 compared to
10% in 2002. The decrease is due to reduced demand for these products. 15




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##### Table of Contents



Sales by product line were as follows: 2003
    
    2002
    
    20018000 Series
    
    $
    4,401,000
    
    
    $
    6,365,000
    
    
    $
    7,770,000EnVoy
    
    
    3,230,000
    
    
    
    1,520,000
    
    
    
    2,235,000ReVolution
    
    
    1,641,000
    (1)
    
    
    
    
    
    
    2000 Series
    
    
    1,578,000
    
    
    
    2,879,000
    
    
    
    5,905,000E-Tool
    
    
    398,000
    (2)
    
    
    
    
    
    
    Field Lite
    
    
    439,000
    (3)
    
    
    599,000
    (3)
    
    
    248,000
    (3)Power Lite
    
    
    156,000
    (3)
    
    
    256,000
    (3)
    
    
    13,000
    (3)IN Rave
    
    
    20,000
    (3)
    
    
    119,000
    (3)
    
    
    89,000
    (3)5000 Series
    
    
    117,000
    (4)
    
    
    487,000
    (4)
    
    
    1,046,000
    (4)$
    11,980,000
    
    
    $
    12,225,000
    
    
    $
    17,306,000
   (1)
    
    The ReVolution was introduced in 2003.(2)
    
    Includes payment for E-Tool development fees.(3)
    
    The Field Lite, Power Lite and IN Rave are Kontron products. The Company
began marketing these products in 2001.(4)
    
    The 5000 Series product was discontinued in fiscal year 2000. Revenues
in 2001, 2002 and 2003 related to sales of remaining units on hand. International sales decreased to $1.3 million, or 11% of net sales in 2003
from $1.6 million, or 13% of net sales in 2002. The majority of international
sales are in Europe, including $0.8 million in 2003 and $0.9 million in 2002.
The Company believes that international sales as a percentage of net sales for
the year 2004 will be in the low- to mid-teen % range with little impact on the
Companys results of operations and liquidity. The Company records all sales
in U.S. Dollars. Gross Margin.Gross margin decreased to $5.1 million in 2003 from $5.5
million in 2002. Gross margins, as a percentage of net sales, decreased to 43%
in 2003 as compared to 45% in 2002 due to the mix of products sold. The
Companys gross margin will fluctuate as a result of a number of factors,
including mix of products sold, inventory obsolescence, the proportion of
international sales, large customer contracts (with the associated volume
discounts) and other manufacturing expenses. Sales and Marketing.Sales and marketing expenses include salaries,
incentive compensation, commissions, travel, trade shows, technical support and
professional services personnel and general advertising and promotion. These
expenses also include the labor and material costs related to maintaining the
Companys standard one-year warranty program on all products with the exception
of the ReVolution which has a three-year limited warranty on some components
and a one-year warranty on some devices and accessories. Sales and marketing
expenses were $1.9 million in 2003, a decrease of $0.4 million as compared to
$2.3 million in 2002. As a percentage of net sales, sales and marketing
expenses decreased to 16% in 2003 as compared to 19% in 2002. The decrease is
due to aggregate changes in the warranty liability for accruals related to
pre-existing warranties, in addition to a change in the commission payment
structure and lower advertising costs. General and Administrative.General and administrative expenses include
the Companys executive, finance, information services and human resources
departments. These expenses stayed consistent at $1.2 million in 2003 and 2002.
As a percentage of net sales, general and administrative expenses increased to
11% in 2003 as compared to 10% in 2002. The increase in percent is due to
slightly lower revenue in 2003 over which to allocate the expenses. 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 $1.1 million in 2003 from
$1.0 million in 2002. As a percentage of net sales, research and development
expenses increased to 9% in 2003 from 8% in 2002. The increase is due to
higher development costs. Loss on Currency Conversion.The Companys credit agreements with Kontron
allow for borrowings which are payable in Euros. In the second quarter of 2001,
the Company began utilizing foreign currency forward contracts to protect
against significant fluctuations in net income (loss) caused by changes in Euro
exchange rates. The Companys practice is to enter into a forward contract at
the 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 year ended December 31,
2003, the Company recorded a net loss on currency conversion of 16




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$140,080. For
the year ended December 31, 2002, the Company recorded a net loss on currency
conversion of $169,222. As of December 31, 2003, the Company entered into a
new forward contract whereby the Company can hedge up to 5.8 million Euros. The Company currently has no other balances or transactions conducted in a
foreign currency. Interest Expense, Net.Net interest expense of $0.5 million was recorded
in 2003 compared to $0.7 million in 2002. The decrease in interest expense is
due to the reduction of the interest rate of the Kontron note payable from 10%
to 8%, effective March 1, 2003, in addition to a $1,655,000 reduction of the
principal balance as part of a February 2003 repayment. COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 30, 2001 Net Sales.Net sales for 2002 were $12.2 million, a decrease of $5.1
million or 29% from 2001 net sales of $17.3 million. The decrease was primarily
attributable to a large order from the United States Army in 2001 with no
comparable large orders in 2002, in addition to general economic conditions.
Unit volumes of the 8000 Series represented 52% of total units in 2002 compared
to 45% in 2001. The increase in percent was due to lower overall sales in
2002. The decreased dollars were due to general economic conditions. Sales
of the 2000 Series Mobile Data Server represented 22% of total units in 2002
compared to 34% in 2001. The decrease in sales was attributable to the large
United States Army order in 2001 with no comparable large orders in 2002. Unit
volumes of the EnVoy product represented 14% of total units in 2002 compared to
13% in 2001. Combined unit volumes of the Field Lite, IN Rave and Power Lite
represented 10% of total units in 2002 compared to 2% in 2001. The Company
began marketing these products in mid-year 2001 so year-over-year figures are
not comparable. Sales by product line were as follows: 2002
    
    2001
    
    20008000 Series
    
    $
    6,365,000
    
    
    $
    7,770,000
    
    
    $
    5,313,0002000 Series
    
    
    2,879,000
    
    
    
    5,905,000
    
    
    
    4,796,000EnVoy
    
    
    1,520,000
    (1)
    
    
    2,235,000
    (1)
    
    
    Field Lite
    
    
    599,000
    (2)
    
    
    248,000
    (2)
    
    
    IN Rave
    
    
    119,000
    (2)
    
    
    89,000
    (2)
    
    
    Power Lite
    
    
    256,000
    (2)
    
    
    13,000
    (2)
    
    
    7000 Series
    
    
    
    (3)
    
    
    
    (3)
    
    
    1,826,000
    (3)5000 Series
    
    
    487,000
    (4)
    
    
    1,046,000
    (4)
    
    
    3,761,000
    (4)$
    12,225,000
    
    
    $
    17,306,000
    
    
    $
    15,696,000
   (1)
    
    The EnVoy product was introduced in 2001.(2)
    
    The Field Lite, IN Rave and Power Lite are Kontron products. The Company
began marketing these products in 2001.(3)
    
    The 7000 Series product was discontinued and replaced with the 8000
Series product in fiscal year 2000.(4)
    
    The 5000 Series product was discontinued in fiscal year 2000. Revenues
in 2001 and 2002 related to sales of remaining units on hand. International sales decreased to $1.6 million, or 13% of sales in 2002
from $2.4 million, or 14% of net sales in 2001. The majority of international
sales are in Europe, including $0.9 million in 2002 and $1.9 million in 2001. Gross Margin.Gross margin decreased to $5.5 million in 2002 from $7.8
million in 2001. Gross margins, as a percentage of net sales, remained constant
at 45% in 2002 and 2001. The Companys gross margin will fluctuate as a result
of a number of factors, including mix of products sold, inventory obsolescence,
the proportion of international sales, large customer contracts (with the
associated volume discounts) and other manufacturing expenses. Sales and Marketing.Sales and marketing expenses include salaries,
incentive compensation, commissions, travel, trade shows, technical support and
professional services personnel and general advertising and promotion. These
expenses also include the labor and material costs related to maintaining the
Companys standard one-year warranty program. Sales and marketing expenses were
$2.3 million in 2002, a decrease of $0.4 million as compared to $2.7 million in
2001. As a percentage
of net sales, sales and marketing expenses increased to 19% in 2002 as
compared to 16% in 2001. The decreased dollars are due to lower sales
commissions paid on lower revenue. The increased percent is due to lower
revenue over which to allocate the costs. 17




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##### Table of Contents



General and Administrative.General and administrative expenses include
the Companys executive, finance, information services and human resources
departments. These expenses decreased to $1.2 million in 2002 compared to $1.7
million in 2001. As a percentage of net sales, general and administrative
expenses stayed constant at 10% in 2002 and 2001. The decreased dollars are due
to lower legal fees and bad debt expense. 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 $1.0 million in 2002 from
$1.2 million in 2001. As a percentage of net sales, research and development
expenses increased to 8% in 2002 from 7% in 2001. The decreased dollars are
due to sharing research and development costs with Kontron and the synergy
gained by the combined efforts. The increased percent is due to lower revenue
over which to allocate the costs. Loss on Foreign Currency.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, and also marks the related debt
instrument to market under SFAS No. 52, Foreign Currency Translation. These
loss amounts are included in the net foreign currency loss of $169,222 recorded
in 2002 and the net foreign currency gain of $207,664 recorded in 2001. As of
December 31, 2002, the Companys forward contract arrangements allowed the
Company to hedge up to 7.0 million Euros. Interest Expense, Net.Net interest expense of $0.7 million was recorded
in 2002 compared to $1.3 million in 2001. The decrease in interest expense is
due to the repayment of the subordinated notes in September 2001 and a
reduction of the interest rate on the Kontron note payable from 11% to 10%
effective July 2002. Additionally, financing costs of $882,000 related to
warrants issued in September 1999 were amortized over the two-year term of the
subordinated notes. On February 27, 2003, the Company repaid $2.0 million to
Kontron. Other Expense, Net.There were no costs booked to other expense in 2002
compared to approximately $119,700 in 2001. The majority of the 2001 costs
were related to the payments that were required to be made under a legal
settlement. 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 were classified as other expense in the Companys 2001 and
2000 statements of operations. LIQUIDITY AND CAPITAL RESOURCES For the third consecutive year, the Company achieved profitability and had
a positive cash flow from operating activities in two of the three prior years.
The Company realizes that continuous management of sales, gross margins and
cash is necessary to improve liquidity. There can be no assurance that the
Company will be successful in achieving these measures. Circumstances that are
reasonably likely to affect liquidity include changes in technology, dependence
on key customers, decrease in demand for the Companys products and reliance on
Kontron for financing and research and development support. 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. 18




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##### Table of Contents



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. In 2003, the Company incurred charges for interest expense to
Kontron of approximately $548,000, relating to the note payable to Kontron.
In the first quarter of 2003, the Company repaid $2.0 million to Kontron.
However, there can be no assurance that additional repayments will be possible. Kontron has provided the Company with a written agreement to provide
financial support to enable the Company to meet its cash flow needs and
obligations as and when they become due through December 31, 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 ($10.6 million
based on December 31, 2003 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 $7.1 million at December 31, 2003 and $7.5 million at December
31, 2002. In the first quarter of 2003, the Company repaid $2.0 million to Kontron,
consisting of approximately $345,000 in accrued interest and approximately
$1,655,000 in principal. However, due to the weakening dollar against the Euro,
the note payable to Kontron only decreased by approximately $358,000 during
2003. The Company has a $750,000 line of credit with a commercial bank and if
necessary, intends to use this line of credit to fund potential cash
requirements in excess of its current cash flow projection. The line of credit
expires May 15, 2004. There were no borrowings outstanding on this line of
credit at December 31, 2003. The Companys cash balance as of December 31, 2003 was $1.7 million as
compared to the December 31, 2002 balance of $2.0 million and the December 30,
2001 balance of $2.1 million. The Companys accounts receivable balance was
$2.7 million at December 31, 2003, $3.1 million at December 31, 2002 and $3.0
million at December 30, 2001. The difference between 2003 and 2002 is due to
lower sales in the fourth quarter of 2003 compared to the fourth quarter of
2002. Net inventories were $1.7 million at December 31, 2003, increased from
$1.0 million at December 31, 2002 and $1.2 million at December 30, 2001. The
change from 2003 to 2002 was attributable to related party purchases of the
ReVolution product with no comparable purchases in 2002 and due to a reduction
in the inventory reserve related to the disposal of unsalable products that did
not have a material effect on net income as reported. Deferred revenue was
$0.7 million at December 31, 2003, $1.1 million at December 31, 2002 and $1.3
million at December 30, 2001. The change from 2003 to 2002 was attributable to
reduced sales of extended warranties. Accounts payable was $1.1 million at
December 31, 2003, $0.8 million at December 31, 2002 and $1.3 million at
December 30, 2001. The increase from 2003 to 2002 was attributable to related
party purchases of the ReVolution product with no comparable purchases in 2002. The Company purchased approximately $8,000 of property, plant and
equipment in 2003 as compared to $55,000 in 2002. The Company anticipates
purchases of property, plant and equipment in 2004 will remain consistent with
2003. 
 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk As of December 31, 2003 the Company had approximately $7.1 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 December 31, 2003, and in
light of the Companys currently effective foreign currency forward contract,
the Company does not believe that a hypothetical 10% change in foreign currency
rates would materially adversely affect its financial position or results of
operations. The Company has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents. The Company had $1.7
million in cash and cash equivalents at December 31, 2003. Based on analysis,
shifts in money market rates would have an immaterial impact on the Company. 19




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##### Table of Contents



ITEM 8. Financial Statements and Supplementary Data Supplementary Financial Information
      (in thousands, except per share amounts) 2003
    
    2002Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4Net Sales
    
    $
    2,127
    
    
    $
    2,864
    
    
    $
    3,223
    
    
    
    3,766
    
    
    $
    3,156
    
    
    $
    2,345
    
    
    $
    2,357
    
    
    $
    4,367Gross Profit
    
    
    924
    
    
    
    1,366
    
    
    
    1,199
    
    
    
    1,615
    
    
    
    1,492
    
    
    
    929
    
    
    
    935
    
    
    
    2,174Net Income (Loss) before
extraordinary items and
cumulative effect of a change in
accounting
    
    
    (301
    )
    
    
    87
    
    
    
    21
    
    
    
    370
    
    
    
    173
    
    
    
    (211
    )
    
    
    (547
    )
    
    
    734Net Income (Loss)
    
    
    (301
    )
    
    
    87
    
    
    
    21
    
    
    
    370
    
    
    
    173
    
    
    
    (211
    )
    
    
    (547
    )
    
    
    734Net Income (Loss) per Common Share
    
    
    (.02
    )
    
    
    .01
    
    
    
    
    
    
    
    .02
    
    
    
    .01
    
    
    
    (.01
    )
    
    
    (.04
    )
    
    
    .05
 The financial statements and notes thereto required pursuant to this Item
begin on page 28 of this Annual Report on Form 10-K. 
 ITEM 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure On July 23, 2002, the Audit Committee approved discontinuing the
engagement of Arthur Andersen LLP (Arthur Andersen) as the Companys
independent auditors and engaging Deloitte & Touche LLP (Deloitte & Touche)
to serve as the Companys independent auditors for the year ending December 31,
2002. Arthur Andersens reports on the Companys consolidated financial
statements for each of the fiscal years ended December 30, 2001 and December
31, 2000 did not contain an adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles. In connection with its audits for the Companys fiscal years ended
December 30, 2001 and December 31, 2000 and through July 23, 2002, there were
no disagreements between the Company and Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures which disagreements, if not resolved to Arthur Andersens
satisfaction, would have caused Arthur Andersen to make reference to the
subject matter of the disagreements in connection with Arthur Andersens report
on the Companys consolidated financial statements for such years; and there
were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K
promulgated under the Exchange Act. During the fiscal years ended December 30,
2001 and December 31, 2000 and through July 23, 2002, the Company did not
consult Deloitte & Touche with respect to the application of accounting
principles to a specified transaction, either completed or proposed, or the
type of audit opinion that might be rendered on the Companys consolidated
financial statements, or any other matters or reportable events listed in Items
304(a)(2)(i) and (ii) of Regulation S-K. The firm of Deloitte & Touche had been
the independent auditors for the Company since July 23, 2002. On July 14, 2003, the Audit Committee approved discontinuing the
engagement of Deloitte & Touche LLP (Deloitte & Touche) as the Companys
independent auditors and engaging Boulay, Heutmaker, Zibell & Co. P.L.L.P.
(BHZ) to serve as the Companys independent auditors for the year ending
December 31, 2003. Deloitte & Touches report on the Companys consolidated
financial statements for the fiscal year ended December 31, 2002 did not
contain an adverse opinion or disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope or accounting principles. In connection
with its audit for the Companys fiscal year ended December 31, 2002 and
through July 14, 2003, there were no disagreements between the Company and
Deloitte & Touche on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures which
disagreements, if not resolved to Deloitte & Touches satisfaction, would have
caused Deloitte & Touche to make reference to the subject matter of the
disagreements in connection with Deloitte & Touches report on the Companys
consolidated financial statements for such year; and there were no reportable
events as defined in Item 304(a)(1)(v) of Regulation S-K promulgated under the
Exchange Act. During the fiscal year ended December 31, 2002 and through July
14, 2003, the Company did not consult BHZ with respect to the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Companys
consolidated financial statements, or any other matters or reportable events
listed in Items 304(a)(2)(i) and (ii) of Regulation S-K. The firm of Boulay,
Heutmaker, Zibell & Co. P.L.L.P. has been the independent auditors for the
Company since July 14, 2003. 20




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##### Table of Contents



Item 9A. 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 fourth 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. 21




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##### Table of Contents



PART III 
 ITEM 10. Directors and Executive Officers of the Registrant 
 The Company has adopted a code of ethics in compliance with applicable
rules of the Securities and Exchange Commission that applies to its principal
executive officer, its principal financial officer and its principal accounting
officer or controller, or persons performing similar functions. The Company has
posted a copy of the code of ethics on the Companys website, at
www.kontronmobile.com. The Company intends to disclose any amendments to, or
waivers from, any provision of the code of ethics by posting such information
on such website. The Companys Board of Directors has determined that William P. Perron,
the chairman of the Audit Committee of the Companys Board of Directors, is an
audit committee financial expert, as defined by the rules of the Securities and
Exchange Commission. Other 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 and Related Stockholder Matters 
 Equity Compensation Plan Information As of December 31, 2003 Number of securitiesremaining available for futureNumber of securities to be
    
    Weighted-average
    
    issuance under equityissued upon exercise of
    
    exercise price of
    
    compensation plansoutstanding options,
    
    outstanding options,

    
    (excluding securitiesPlan category
    
    warrants and rights
    
    warrants and rights
    
    reflected in column (a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders(1)
    
    
    4,607,751
    
    
    $
    1.31
    
    
    
    368,777Equity compensation
plans not approved
by security holders
    
    None
    
    None
    
    NoneTotal
    
    
    4,607,751
    
    
    $
    1.31
    
    
    
    368,777
 (1) Includes shares issuable under the Companys 1994 Long Term Incentive
and Stock Option Plan and 1996 Directors Stock Option Plan. Other 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. 22




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##### Table of Contents



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. ITEM 14. Principal Accountant Fees and Services 
 Information required by this item is set forth in the Proxy Statement
under the headings Audit Fees, Audit-Related Fees, Tax Fees, All Other
Fees and Approval of Independent Auditor Services and Fees, and is
incorporated herein by reference. 23




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##### Table of Contents



PART IV 
 ITEM 15. 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 31, 2003, December 31, 2002 and December 30, 2001, 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:The Company filed an 8-K dated November 14, 2003 reporting under Item 7
(Financial Statements and Exhibits) and Item 12 (Results of Operations
and Financial Condition), a press release announcing the Companys
financial results for the third quarter ended September 30, 2003.The Company filed an 8-K dated December 3, 2003 reporting under Item
5 (Other Events), a press release announcing that the Company has
received an offer from Kontron AG expressing the interest of Kontron AG
to acquire all of the shares of the Companys common stock not currently
owned or controlled by Kontron AG. Kontron AG offers to pay $0.45 per
share of common stock. 24




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##### Table of Contents



SIGNATURES 
 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.By
    
    /s/ Thomas SparrvikThomas SparrvikChief Executive OfficerDated: March 30, 2004
 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
Thomas Sparrvik
    
    Chief Executive Officer(principal executive officer)
    
    March 30, 2004/s/ Dale R. Szymborski
Dale R. Szymborski
    
    President(principal financial and accounting officer)
    
    March 30, 2004/s/ David C. Malmberg
David C. Malmberg
    
    Chairman of the Board
    
    March 30, 2004/s/ Pierre McMaster
Pierre McMaster
    
    Director
    
    March 30, 2004/s/ William P. Perron
William P. Perron
    
    Director
    
    March 30, 2004/s/ Richard L. Poss
Richard L. Poss
    
    Director
    
    March 30, 2004/s/ Rudolf Wieczorek
Rudolf Wieczorek
    
    Director
    
    March 30, 2004
 25




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##### Table of Contents



INDEX TO EXHIBITS 
 ExhibitNo
    
    Description3.1
    
    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)4.2
    
    Amendment to Loan Agreement between Kontron Embedded Computers AG
and the Company effective July 1, 2002 (incorporated by reference
to the exhibit 4.1 filed with the Companys Report on Form 10-Q
for the quarter ended September 30, 2002)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
    
    1996 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
    
    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)10.6
    
    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)10.7
    
    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)10.8
    
    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)10.9
    
    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)10.10
    
    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)10.11
    
    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)
 26




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##### Table of Contents



ExhibitNo
    
    Description10.12
    
    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)10.13
    
    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)10.14
    
    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)10.15
    
    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)10.16
    
    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)10.17
    
    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)10.18
    
    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)10.19
    
    Compensation Agreement with Richard F. Woodruff, Jr. dated October 26, 2001 (incorporated by
reference to the exhibit 10.21 filed with the Companys Report on 10-K for the fiscal year ended
December 31, 2002)10.20
    
    Consulting Agreement dated June 2, 2003 between the Company and David C. Malmberg (incorporated by
reference to the exhibit 10.1 filed with the Companys Report on form 10-Q for the fiscal quarter
ended June 30, 2003)10.21
    
    2004 Compensation Plan for Thomas Sparrvik (filed herewith)10.22
    
    2004 Compensation Plan for Dale R. Szymborski (filed herewith)10.23
    
    Compensation Agreement with Dale R. Szymborski dated January 1, 2004 (filed herewith)23.1
    
    Consent of Boulay, Heutmaker, Zibell & Co. P.L.L.P. (filed herewith)23.2
    
    Consent of Deloitte & Touche LLP (filed herewith)23.3
    
    Notice regarding consent of Arthur Andersen LLP (filed herewith)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith)31.2
    
    Certification of President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)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 (filed herewith)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 (filed herewith)
 27




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##### Table of Contents



BALANCE SHEETS 
 December 31,2003
    
    2002ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,694,302
    
    
    $
    2,031,285Accounts receivable, net of allowance for doubtful accounts of $158,200 and $127,200
    
    
    2,562,900
    
    
    
    3,015,258Accounts receivable, related parties
    
    
    185,046
    
    
    
    119,919Inventories
    
    
    1,678,254
    
    
    
    975,263Prepaid expenses and other
    
    
    50,602
    
    
    
    54,269Total current assets
    
    
    6,171,104
    
    
    
    6,195,994Property and Equipment:Computers and equipment
    
    
    1,172,007
    
    
    
    1,163,624Furniture and fixtures
    
    
    800,706
    
    
    
    800,706Leasehold improvements
    
    
    346,099
    
    
    
    346,099Less: Accumulated depreciation and amortization
    
    
    (2,226,309
    )
    
    
    (2,129,623
    )Property and equipment, net
    
    
    92,503
    
    
    
    180,806Deposits and Other Assets, net
    
    
    6,556
    
    
    
    39,398Total Assets
    
    $
    6,270,163
    
    
    $
    6,416,198LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current Liabilities:Accounts payable
    
    $
    144,527
    
    
    $
    401,845Accounts payable, related parties
    
    
    959,627
    
    
    
    412,425Accrued warranty
    
    
    203,000
    
    
    
    332,169Accrued compensation and benefits
    
    
    255,154
    
    
    
    272,312Accrued interest to Kontron AG
    
    
    450,575
    
    
    
    Other accrued liabilities
    
    
    148,684
    
    
    
    340,174Deferred revenue, short-term
    
    
    537,372
    
    
    
    1,064,292Total current liabilities
    
    
    2,698,939
    
    
    
    2,823,217Long Term Liabilities:Note payable to Kontron AG
    
    
    7,103,910
    
    
    
    7,462,071Deferred revenue, long-term
    
    
    159,158
    
    
    
    Total long term liabilities
    
    
    7,263,068
    
    
    
    7,462,071Total Liabilities
    
    
    9,962,007
    
    
    
    10,285,288Commitments and Contingencies (Note 7)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
    
    
    
    4,250Series C Convertible Preferred Stock, $.001 par value, 500,000 shares authorized;
500,000 issued and outstanding for both periods
    
    
    500
    
    
    
    500Common stock, $.001 par value, 30,000,000 shares authorized; 14,952,926 issued
and outstanding for both periods
    
    
    14,953
    
    
    
    14,953Additional paid-in capital
    
    
    32,551,972
    
    
    
    32,551,972Accumulated deficit
    
    
    (36,263,519
    )
    
    
    (36,440,765
    )Total shareholders equity (deficit)
    
    
    (3,691,844
    )
    
    
    (3,869,090
    )Total liabilities and shareholders equity (deficit)
    
    $
    6,270,163
    
    
    $
    6,416,198
 The accompanying notes are an integral part of these financial statements. 28




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##### Table of Contents



STATEMENTS OF OPERATIONS 
 For the Years EndedDecember 31,
    
    December 31,
    
    December 30,2003
    
    2002
    
    2001Net Sales$
    11,979,760
    
    
    $
    12,225,137
    
    
    $
    17,306,146Cost of Sales
    
    
    6,876,308
    
    
    
    6,694,759
    
    
    
    9,486,877Gross profit
    
    
    5,103,452
    
    
    
    5,530,378
    
    
    
    7,819,269Operating Expenses:Sales and marketing
    
    
    1,919,031
    
    
    
    2,293,334
    
    
    
    2,747,064General and administrative
    
    
    1,236,252
    
    
    
    1,186,845
    
    
    
    1,739,711Research and development
    
    
    1,099,345
    
    
    
    1,040,481
    
    
    
    1,205,491Total operating expenses
    
    
    4,254,628
    
    
    
    4,520,660
    
    
    
    5,692,266Operating income
    
    
    848,824
    
    
    
    1,009,718
    
    
    
    2,127,003Gain (loss) on foreign currency
    
    
    (140,080
    )
    
    
    (169,222
    )
    
    
    207,664Interest expense, net
    
    
    (531,498
    )
    
    
    (691,774
    )
    
    
    (1,274,607
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    (119,701
    )Net income applicable to common shareholders
    
    $
    177,246
    
    
    $
    148,722
    
    
    $
    940,359Basic and Diluted Income Per Common Share:Net income per common share
    
    $
    .01
    
    
    $
    .01
    
    
    $
    .06Basic weighted average common shares outstanding
    
    
    14,952,926
    
    
    
    14,952,926
    
    
    
    14,945,293Diluted weighted average common shares outstanding
    
    
    20,421,676
    
    
    
    20,421,775
    
    
    
    15,028,848
 The accompanying notes are an integral part of these financial statements. 29




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##### Table of Contents



STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT) 
 TotalPreferred Stock
    
    Common Stock
    
    AdditionalPaid-in
    
    Accumulated
    
    ShareholdersEquityShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Deficit
    
    (Deficit)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
    
    
    
    
    
    
    
    27,120Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    940,359
    
    
    
    940,359Balance, December 30, 2001
    
    
    4,750,000
    
    
    
    4,750
    
    
    
    14,952,926
    
    
    
    14,953
    
    
    
    32,551,972
    
    
    
    (36,589,487
    )
    
    
    (4,017,812
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148,722
    
    
    
    148,722Balance, December 31, 2002
    
    
    4,750,000
    
    
    
    4,750
    
    
    
    14,952,926
    
    
    
    14,953
    
    
    
    32,551,972
    
    
    
    (36,440,765
    )
    
    
    (3,869,090
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177,246
    
    
    
    177,246Balance, December 31, 2003
    
    
    4,750,000
    
    
    $
    4,750
    
    
    
    14,952,926
    
    
    $
    14,953
    
    
    $
    32,551,972
    
    
    $
    (36,263,519
    )
    
    $
    (3,691,844
    )
 The accompanying notes are an integral part of these financial statements. 30




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##### Table of Contents



STATEMENTS OF CASH FLOWS For the Years EndedDecember 31,
    
    December 31,
    
    December 30,2003
    
    2002
    
    2001Operating Activities:Net income
    
    $
    177,246
    
    
    $
    148,722
    
    
    $
    940,359Adjustments to reconcile net income to net cash provided by (used for)
operating activities Depreciation and amortization
    
    
    96,686
    
    
    
    218,379
    
    
    
    507,439Provision for losses on accounts receivable
    
    
    (67,358
    )
    
    
    
    
    
    
    Provision for accrued warranty
    
    
    (129,169
    )
    
    
    
    
    
    
    Loss (gain) on foreign currency
    
    
    140,080
    
    
    
    169,222
    
    
    
    (207,664
    )Non-cash financing
    
    
    
    
    
    
    
    
    
    
    330,750Loss on disposal of property and equipment
    
    
    
    
    
    
    
    
    
    
    30,144Changes in operating items:Accounts receivable
    
    
    454,589
    
    
    
    (182,555
    )
    
    
    143,829Inventories
    
    
    (702,991
    )
    
    
    216,013
    
    
    
    1,296,367Prepaid expenses and other
    
    
    36,509
    
    
    
    260,253
    
    
    
    126,141Accounts payable
    
    
    289,884
    
    
    
    (514,365
    )
    
    
    (1,864,188
    )Accrued expenses
    
    
    181,539
    
    
    
    (444,457
    )
    
    
    (1,248,105
    )Deferred revenue
    
    
    (367,762
    )
    
    
    (242,271
    )
    
    
    567,569Net cash provided by (used for) operating activities
    
    
    109,253
    
    
    
    (371,059
    )
    
    
    622,641Investing Activities:Purchase of property and equipment
    
    
    (8,383
    )
    
    
    (54,818
    )
    
    
    (23,861
    )Financing Activities:Proceeds from (repayments of) note to Kontron AG
    
    
    (1,655,349
    )
    
    
    (410,108
    )
    
    
    3,933,781Net proceeds from forward contracts
    
    
    1,217,496
    
    
    
    793,300
    
    
    
    Repayment of subordinated notes
    
    
    
    
    
    
    
    
    
    
    (3,000,000
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    27,120Payment of capitalized lease obligations
    
    
    
    
    
    
    
    
    
    
    (38,598
    )Net cash provided by (used for) financing activities
    
    
    (437,853
    )
    
    
    383,192
    
    
    
    922,303Change in Cash and Cash Equivalents
    
    
    (336,983
    )
    
    
    (42,685
    )
    
    
    1,521,083Cash and Cash Equivalents, beginning of year
    
    
    2,031,285
    
    
    
    2,073,970
    
    
    
    552,887Cash and Cash Equivalents, end of year
    
    $
    1,694,302
    
    
    $
    2,031,285
    
    
    $
    2,073,970Supplemental Cash Flow Disclosure:Cash paid for interest
    
    $
    344,651
    
    
    $
    1,062,639
    
    
    $
    1,349,856
 The accompanying notes are an integral part of these financial statements. 31




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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 to be a key provider of tools and
services to facilitate field data acquisition, test and measurement, telemetry,
mobile computing and communication applications through the partnership with
value-added resellers. The markets for the Companys products consist of those
businesses, armed forces, national and local governmental agencies and other
entities that are seeking reliable mobile computing for field personnel and
functions. 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 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 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
controls approximately 65% of the Company 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 the Company. Significant Risks and Uncertainties.For the third consecutive year, the
Company achieved profitability and had a positive cash flow from operating
activities in two of the three prior years. The Company realizes that
continuous management of sales, gross margins and cash is necessary to improve
liquidity. There can be no assurance that the Company will be successful in
achieving these measures. Circumstances that are reasonably likely to affect
liquidity include changes in technology, dependence on key customers, decrease
in demand for the Companys products and reliance on Kontron for financing and
research and development support. 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. In 2003, the Company incurred charges for interest expense to
Kontron of approximately $548,000, relating to the note payable to Kontron. In
the first quarter of 2003, the Company repaid $2.0 million to Kontron.
However, there can be no assurance that additional repayments will be possible. Kontron has provided the Company with a written agreement to provide
financial support to enable the Company to meet its cash flow needs and
obligations as and when they become due through December 31, 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 ($10.6 million
based on December 31, 2003 exchange rate.) Borrowings under this agreement bear
interest at 8% per annum (payable monthly). The maturity date of the note is
July 1, 2011. 32




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##### Table of Contents



Outstanding borrowings under this line of credit were approximately $7.1
million at December 31, 2003 and $7.5 million at December 31, 2002. In the first quarter of 2003, the Company repaid $2.0 million to Kontron,
consisting of approximately $345,000 in accrued interest and approximately
$1,655,000 in principal. However, due to the weakening dollar against the Euro,
the note payable to Kontron only decreased by approximately $358,000 during
2003. The Company has a $750,000 line of credit with a commercial bank and if
necessary, intends to use this line of credit to fund potential cash
requirements in excess of its current cash flow projection. The line of credit
expires May 15, 2004. There were no borrowings outstanding on this line of
credit at December 31, 2003. 2. Summary of Significant Accounting Policies Fiscal Year.In 2002, the Company changed to a fiscal year ending on
December 31. The Company believes that this change does not significantly
affect the comparability of the financial statements. Prior to 2002, fiscal
years ended on the Sunday closest to December 31st. All references herein to
2003, 2002 and 2001 represent the fiscal years ended December 31, 2003,
December 31, 2002 and December 30, 2001 respectively, each of which were
52-week years. Earnings Per Common Share.Basic earnings per share is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the fiscal year. Diluted earnings 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: 2003
    
    2002
    
    2001Net income applicable to common shareholders
    
    $
    177,246
    
    
    $
    148,722
    
    
    $
    940,359Weighted average common shares outstanding
    
    
    14,952,926
    
    
    
    14,952,926
    
    
    
    14,945,293Dilutive potential common shares
    
    
    
    
    
    
    99
    
    
    
    83,555Impact of convertible preferred shares
    
    
    5,468,750
    
    
    
    5,468,750
    
    
    
    Weighted average common and dilutive shares outstanding
    
    
    20,421,676
    
    
    
    20,421,775
    
    
    
    15,028,848Basic earnings per share
    
    $
    .01
    
    
    $
    .01
    
    
    $
    .06Diluted earnings per share
    
    $
    .01
    
    
    $
    .01
    
    
    $
    .06
 Potential common shares of 4,607,751, 4,605,451 and 9,916,450 related to
options, warrants and convertible preferred stock were excluded from the
computation of diluted earnings per share for 2003, 2002 and 2001 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. At times throughout the year, the Companys cash and cash equivalents
balances may exceed amounts insured by the Federal Deposit Insurance
Corporation. Cash in the Companys checking and money market account are both
federally insured. At December 31, 2003 and 2002, uninsured balances totaled
$1,493,994 and $1,932,180, respectively. Trade Accounts Receivable.Credit terms are extended to customers in the
normal course of business. The Company performs ongoing credit evaluations of
its customers financial condition and, generally, requires no collateral. Trade accounts receivable are recorded at their estimated net realizable
value, net of an allowance for doubtful accounts. The Companys estimate of
the allowance for doubtful accounts is based upon historical experience, its
evaluation of the current status of receivables, and unusual circumstances, if
any. Accounts are considered past due if payment is not made on a timely basis
in accordance with the Companys credit terms. Accounts considered
uncollectible are charged against the allowance. Inventories.Inventories are stated at the lower of cost or market value,
as determined by the first-in, first-out cost method. 33




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##### Table of Contents



The components of inventories were: December 31,2003
    
    2002Raw Materials
    
    $
    1,224,853
    
    
    $
    626,560Work In Process
    
    
    294,884
    
    
    
    59,962Finished Goods
    
    
    158,517
    
    
    
    288,741Total
    
    $
    1,678,254
    
    
    $
    975,263
 The Company reviews its inventory quantities on hand quarterly and records
a provision for estimated obsolescence or unmarketable inventory based upon
usage and assumptions about future demand and market conditions. At December
31, 2003 and 2002, the inventory reserve was approximately $1,311,600 and
approximately $2,173,100, respectively. The change in the reserve from 2002 to
2003 was primarily related to the disposal of unsalable products and did not
have a material effect on net income as reported. Property and Equipment.Property and equipment are recorded at cost or
estimated fair value. 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 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 years ended December 31, 2003 and December
31, 2002: Aggregate Changes inAggregate
    
    the Liability forReductions in the
    
    Accruals Related to
    
    Aggregate Changes inLiability for
    
    Product Warranties
    
    the Liability for AccrualsBeginning
    
    Payments Made
    
    Issued During the
    
    Related to Pre-Existing
    
    EndingYear
    
    Balance
    
    Under the Warranties
    
    Reporting Periods
    
    Warranties
    
    Balance2003
    
    $
    332,169
    
    
    $
    (135,828
    )
    
    $
    135,828
    
    
    $
    (129,169
    )
    
    $
    203,0002002
    
    
    332,169
    
    
    
    (170,084
    )
    
    
    170,084
    
    
    
    
    
    
    
    332,169
 Revenue Recognition.The Company generally recognizes sales upon shipment
of its products. In certain limited situations, at the customers written
request, the Company enters into bill and hold transactions whereby title
transfers to the customer, but the product does not ship until a specified
later date. The Company recognizes revenues associated with bill and hold
arrangements when the product is complete, ready to ship, and all bill and hold
revenue recognition criteria have been met. Accruals for sales returns and
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.No customers represented greater than 10% of net
sales in 2003. Sales to the United States Army represented 15% of net sales in
2002 and 28% of net sales in 2001. Research and Development.Research and development costs are charged to
expense as incurred. Concentrations of Credit Risk.At December 31, 2003, three customers made
up 77% of the outstanding, non-related party, accounts receivable balance. At
December 31, 2002, two customers made up 74% of the outstanding, non-related
party, accounts receivable balance and all amounts due on these balances were
collected subsequent to year-end. 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. 34




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##### Table of Contents



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 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. Fair Value of Financial Instruments. The Companys financial instruments
consist of cash and cash equivalents and a note payable to Kontron. The
carrying value of the Companys cash and cash equivalents approximates fair
value. It is currently not practicable to estimate the fair value of the note
payable to Kontron due to the related party nature of the note and due to the
unique terms and conditions contained in the note. 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;
however, it requires additional footnote disclosure. 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: 2003
    
    2002
    
    2001Net income, as reported
    
    $
    177,246
    
    
    $
    148,722
    
    
    $
    940,359Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards
    
    
    (231,579
    )
    
    
    (265,274
    )
    
    
    (29,642
    )Pro forma net income (loss)
    
    $
    (54,333
    )
    
    $
    (116,552
    )
    
    $
    910,717Net income (loss) per share:Basic and
diluted  as reported
    
    $
    .01
    
    
    $
    .01
    
    
    $
    .06Basic and
diluted  pro forma
    
    
    
    
    
    
    (.01
    )
    
    
    .06
 35




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##### Table of Contents



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. Foreign Currency Transactions. As described in Note 4, 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 year ended December 31, 2003,
the Company recorded a net loss on currency conversion of $140,080. For the
years ending December 31, 2002 and December 30, 2001, the Company recorded a
net loss on currency conversion of $169,222 and a net gain on currency
conversion of $207,664, respectively. As of December 31, 2003, the Company
entered into a new forward contract whereby the Company can hedge up to 5.8
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 $0.9 million in 2003, $1.1 million in 2002, and
$1.3 million in 2001. The Company also buys products from these related
entities for further resale within North America. These purchases were
approximately $4.2 million in 2003, $2.0 million in 2002, and $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. Included in the financial statements are approximately $185,000 and
$119,900 of related party receivables and approximately $959,600 and $412,400
of related party payables as of December 31, 2003 and December 31, 2002,
respectively. The Company has a credit line agreement with Kontron to provide up to 8.5
million Euros for operations ($10.6 million based on December 31, 2003 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 $7.1 million at
December 31, 2003 and approximately $7.5 million at December 31, 2002. On
February 27, 2003, the Company repaid $2.0 million to Kontron; however, there
can be no assurance that additional repayments will be made. 3. 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: 2003
    
    2002
    
    2001Federal statutory rate
    
    
    34
    %
    
    
    34
    %
    
    
    34
    %State taxes, net of federal tax benefit
    
    
    4
    %
    
    
    4
    %
    
    
    4
    %Valuation allowance
    
    
    (38
    )%
    
    
    (38
    )%
    
    
    (38
    )%Total
    
    
    
    %
    
    
    
    %
    
    
    
    %
 36




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##### Table of Contents



As of December 31, 2003, the Company had approximately $31 million of net
operating loss carryforwards for federal
income tax purposes that are available to offset future taxable income
through the year 2023. 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: 2003
    
    2002Net operating loss and tax credit carryforwards
    
    $
    12,280,000
    
    
    $
    11,864,000Inventory valuation
    
    
    479,000
    
    
    
    826,000Other timing differences
    
    
    1,306,000
    
    
    
    1,353,000Valuation allowance
    
    
    (14,065,000
    )
    
    
    (14,043,000
    )Total
    
    $
    
    
    
    $
    
 A full valuation allowance has been established to offset the deferred tax
assets, as management currently believes that it is more likely than not that
the benefit will not be realized. 4. Line of Credit and Subordinated Notes Payable Kontron AG Line of Credit.The Company has a credit line agreement with
Kontron to provide up to 8.5 million Euros for operations ($10.6 million based
on December 31, 2003 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 $7.1 million at December 31, 2003 and approximately $7.5 million
at December 31, 2002. Interest expense was approximately $548,000,
approximately $723,000, and approximately $672,000 in the years 2003, 2002 and
2001, respectively. 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. 5. Shareholders Equity Warrants to purchase 2,337,501 shares of the Companys common stock were
outstanding for both periods ending December 31, 2003 and December 31, 2002.
The warrants are exercisable at various times through February 2007 at prices
ranging from $1.00 to $2.00. 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 in exchange 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. 37




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6. 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 31, 2003 and December 31, 2002,
331,277 and 283,627 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 31, 2003 and December 31, 2002, 37,500 and 87,500
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 2003, 2002 or 2001, as the market value
of the Companys common stock was less than the exercise price for these
options. Shares subject to option are summarized as follows: Incentive
    
    Weighted Average
    
    Non-qualified
    
    Weighted AverageStock Options
    
    Exercise Price
    
    Stock Options
    
    Exercise PriceBalance, December 31, 2000
    
    
    1,134,950
    
    
    $
    1.05
    
    
    
    1,001,250
    
    
    $
    2.58Options granted
    
    
    31,500
    
    
    
    .73
    
    
    
    110,000
    
    
    
    .72Options canceled
    
    
    (327,750
    )
    
    
    1.34
    
    
    
    
    
    
    
    Options exercised
    
    
    (50,000
    )
    
    
    .42
    
    
    
    (8,500
    )
    
    
    .72Balance, December 30, 2001
    
    
    788,700
    
    
    
    .96
    
    
    
    1,102,750
    
    
    
    2.41Options granted
    
    
    423,250
    
    
    
    .82
    
    
    
    50,000
    
    
    
    .63Options canceled
    
    
    (96,750
    )
    
    
    1.01
    
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2002
    
    
    1,115,200
    
    
    
    .90
    
    
    
    1,152,750
    
    
    
    2.33Options granted
    
    
    2,850
    
    
    
    .32
    
    
    
    50,000
    
    
    
    .28Options canceled
    
    
    (35,500
    )
    
    
    .83
    
    
    
    (15,000
    )
    
    
    2.90Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2003
    
    
    1,082,550
    
    
    $
    .87
    
    
    
    1,187,750
    
    
    $
    1.93Options exercisable at:December 30, 2001
    
    
    67,530
    
    
    $
    1.28
    
    
    
    752,000
    
    
    $
    2.60December 31, 2002
    
    
    335,970
    
    
    $
    .88
    
    
    
    907,950
    
    
    $
    2.63December 31, 2003
    
    
    557,875
    
    
    $
    .87
    
    
    
    929,250
    
    
    $
    2.16
 Additional information regarding options outstanding at December 31, 2003
is as follows: Weighted AverageNumber
    
    Exercise
    
    Weighted Average
    
    RemainingType of Option
    
    of Options
    
    Price Range
    
    Exercise Price
    
    Contractual LifeIncentive
    
    
    612,600
    
    
    $
    0.28-$1.00
    
    
    $
    0.72
    
    
    4.68 yearsIncentive
    
    
    469,950
    
    
    
    1.01-1.88
    
    
    
    1.16
    
    
    3.40 years1,082,550Nonqualified
    
    
    276,500
    
    
    
    0.28-1.00
    
    
    
    0.70
    
    
    6.88 yearsNonqualified
    
    
    659,750
    
    
    
    1.01-3.00
    
    
    
    1.51
    
    
    3.81 yearsNonqualified
    
    
    251,500
    
    
    
    3.01-6.50
    
    
    
    5.58
    
    
    3.43 years1,187,750
 38




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The weighted average fair values of options granted were as follows: Incentive
    
    NonqualifiedStock Options
    
    Stock Options2003 grants
    
    $
    0.32
    
    
    $
    0.282002 grants
    
    
    0.82
    
    
    
    0.662001 grants
    
    
    0.72
    
    
    
    0.74
 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 2003, 2002 and 2001: 2003
    
    2002
    
    2001Risk-free interest rate for incentive options
    
    
    2.84
    %
    
    
    3.63
    %
    
    
    4.86
    %Risk-free interest rate for non-incentive options
    
    
    3.57
    %
    
    
    5.16
    %
    
    
    5.39
    %Expected life of incentive options
    
    7 years
    
    7 years
    
    7 yearsExpected life of nonqualified options
    
    10 years
    
    10 years
    
    10 yearsExpected volatility
    
    
    160
    %
    
    
    156
    %
    
    
    150
    %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. In 2003, 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
$40,600, $38,500 and $40,500 for 2003, 2002 and 2001, respectively. 7. Commitments and Contingencies Leases.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. As of August 2002, the sublessee in the larger space notified the Company
that it was unable to meet its full rent obligation. The Company agreed to
accept a demand promissory note for each month that the sublessee paid short,
bearing simple interest at the rate of 12% per annum, compounded monthly. On
December 11, 2003, the Company and the sublessee entered into a lease
amendment. Under the terms of the amendment, the sublessee paid the Company
$70,000 and the Company accepted this as full payment of all previous
promissory notes and accrued interest on those notes, forgiving $56,023 in
promissory notes through November 30, 2003. The Company agreed to accept
reduced rent for December 2003 through March 2004 in full payment for those
periods and the sublessee is not obligated to pay any additional rent beyond
March 31, 2004. The Company will give the sublessee at least 60 days notice to
vacate its current space, but would allow the sublessee to continue occupying
its current premises on a rent-free basis through the duration of the original
lease agreement if the Company should not require the space. In light of the anticipated expiration of its current lease in November
2004, the Company is currently reviewing options for potential new facilities
in 2004. The Company has two operating leases, including a photocopier lease and a
lease for the current leased facilities. The minimum operating lease payments
associated with these leases in 2004 are approximately $449,000. There are no
operating lease obligations beyond November 2004. Total expenses for operating
leases in 2003, 2002 and 2001 were approximately $501,000, approximately
512,000 and approximately 497,000, respectively. Rent payments received from
sublessees were $196,553 in 2003, inclusive of the $70,000 one-time payment
discussed above, $178,677 in 2002 and $209,993 in 2001. The Company does not have any capital leases as of December 31, 2003. Legal Proceedings.The Company is not involved in any pending legal
proceedings. 39




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##### Table of Contents



8. 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: 2003
    
    2002
    
    2001United States
    
    $
    10,667,000
    
    
    $
    10,595,000
    
    
    $
    14,875,000Europe
    
    
    790,000
    
    
    
    855,000
    
    
    
    1,865,000Americas (excluding United States)
    
    
    464,000
    
    
    
    574,000
    
    
    
    301,000Asia
    
    
    59,000
    
    
    
    184,000
    
    
    
    118,000Other
    
    
    
    
    
    
    17,000
    
    
    
    147,000$
    11,980,000
    
    
    $
    12,225,000
    
    
    $
    17,306,000
 Sales by product line were as follows: 2003
    
    2002
    
    20018000 Series
    
    $
    4,401,000
    
    
    $
    6,365,000
    
    
    $
    7,770,000EnVoy
    
    
    3,230,000
    
    
    
    1,520,000
    
    
    
    2,235,000ReVolution
    
    
    1,641,000
    (1)
    
    
    
    
    
    
    2000 Series
    
    
    1,578,000
    
    
    
    2,879,000
    
    
    
    5,905,000E-Tool
    
    
    398,000
    (2)
    
    
    
    
    
    
    Field Lite
    
    
    439,000
    (3)
    
    
    599,000
    (3)
    
    
    248,000
    (3)Power Lite
    
    
    156,000
    (3)
    
    
    256,000
    (3)
    
    
    13,000
    (3)IN Rave
    
    
    20,000
    (3)
    
    
    119,000
    (3)
    
    
    89,000
    (3)5000 Series
    
    
    117,000
    (4)
    
    
    487,000
    (4)
    
    
    1,046,000
    (4)$
    11,980,000
    
    
    $
    12,225,000
    
    
    $
    17,306,000
   (1)
    
    The ReVolution was introduced in 2003.(2)
    
    Includes payment for E-Tool development fees.(3)
    
    The Field Lite, Power Lite and IN Rave are Kontron products. The Company
began marketing these products in 2001.(4)
    
    The 5000 Series product was discontinued in fiscal year 2000. Revenues
in 2001, 2002 and 2003 related to sales of remaining units on hand. All of the Companys long-lived assets are located in the United States. 40




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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of
   Kontron Mobile Computing, Inc.
Eden Prairie, Minnesota We have audited the accompanying balance sheet of Kontron Mobile Computing,
Inc. as of December 31, 2003, and the related statements of operations,
shareholders equity (deficit), and cash flows for the year then ended. Our
audit also included the financial statement schedule for the year ended
December 31, 2003 listed in the Index at Item 15. These financial statements
and financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit. The financial
statements and financial statement schedule of Kontron Mobile Computing, Inc.
as of and for the year ended December 31, 2002, were audited by other auditors
whose report dated January 24, 2003 (February 27, 2003 as to the last sentence
of Note 2), expressed an unqualified opinion on those financial statements and
financial statement schedule. The financial statements and financial statement
schedule of Kontron Mobile Computing, Inc. as of and for the year ended
December 30, 2001 were audited by other auditors who have ceased operations and
whose report dated February 11, 2002 expressed an unqualified opinion on those
financial statements and financial statement schedule. We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion. In our opinion, the 2003 financial statements referred to above present fairly,
in all material respects, the financial position of Kontron Mobile Computing,
Inc. as of December 31, 2003, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein as of December 31, 2003, and for the year then
ended. /s/
    
    Boulay, Heutmaker, Zibell & Co. P.L.L.PCertified Public Accountants
 Minneapolis, Minnesota
January 23, 2004 41




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INDEPENDENT AUDITORS REPORT To the Board of Directors and Shareholders of Kontron Mobile Computing, Inc.: We have audited the accompanying consolidated balance sheet of Kontron Mobile
Computing, Inc. (the Company) as of December 31, 2002 and the related
statements of operations, shareholders equity (deficit), and cash flows for
the year then ended. Our audit also included the financial statement schedule
for the year ended December 31, 2002 listed in the Index at Item 15. These
financial statements and financial statement schedule are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements and financial
statement schedule of the Company for the year ended December 30, 2001 were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those financial statements and financial statement
schedule in their report dated February 11, 2002. We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material
respects, the financial position of Kontron Mobile Computing, Inc. as of
December 31, 2002 and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the financial statements taken as a
whole, presents fairly in all material respects, the information set forth
therein as of December 31, 2002 and for the year then ended. DELOITTE & TOUCHE LLP Minneapolis, Minnesota
January 24, 2003
(February 27, 2003 as to the last sentence of Note 2) 42




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##### Table of Contents



This is a copy of a report previously issued by Arthur Andersen LLP. This
report has not been reissued by Arthur Andersen LLP nor has Arthur Andersen LLP
provided a consent to the inclusion of its report in this Annual Report. 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 43




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##### Table of Contents



SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Fiscal
    
    Balance at
    
    Additions Charged
    
    Write-Offs of
    
    Decrease
    
    Balance at End ofYear
    
    Beginning of Year
    
    to Expense
    
    Accounts
    
    in Allowance
    
    Year2003
    
    Allowance for Doubtful Accounts
    
    $
    127,200
    
    
    $
    67,400
    
    
    $
    (36,400
    )
    
    
    
    
    
    $
    158,2002002
    
    Allowance for Doubtful Accounts
    
    
    317,200
    
    
    
    
    
    
    
    (73,600
    )
    
    
    (116,400
    )
    
    
    127,2002001
    
    Allowance for Doubtful Accounts
    
    
    334,100
    
    
    $
    132,700
    
    
    
    (149,600
    )
    
    
    
    
    
    
    317,200Accrued Restructuring Costs
    
    
    44,300
    
    
    
    
    
    
    
    (44,300
    )
    
    
    
    
    
    
    