<PAGE>
CONFORMED COPY
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1998 Commission File No. 0-9996
DOTRONIX, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1387074
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at October 12, 1998
----------------------- -------------------------------
Common stock, par value 4,039,601 shares
$ .05 per share
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DOTRONIX, INC.
INDEX
Part I - Financial Information Page(s)
- ------------------------------ -------
Item 1. Financial Statements (Unaudited)
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7-8
Part II - Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 9
EXHIBIT 27 - Financial Data Schedule 10
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOTRONIX, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS September 30, June 30,
1998 1998
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 649,570 $ 290,578
Accounts receivable, less allowance
for doubtful accounts of $36,588 1,386,131 1,141,845
Inventories:
Raw materials 2,598,292 2,975,987
Work-in-process 633,184 443,728
Finished goods 358,937 485,022
------------ ------------
Total inventories 3,590,413 3,904,737
Prepaid expenses 60,586 15,324
------------ ------------
Total Current Assets 5,686,700 5,352,484
PROPERTY, PLANT & EQUIPMENT, (Note B)
at cost net of accumulated depreciation
of $5,590,492 and $5,549,793, respectively 1,106,319 1,121,679
OTHER ASSETS:
Excess of cost over fair value of net assets
acquired, less amortization 611,980 629,980
Other 53,037 66,202
------------ ------------
TOTAL ASSETS $ 7,458,036 $ 7,170,345
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving loans $ 882,877 $ 254,264
Accounts payable 308,028 284,230
Salaries, wages and payroll taxes 202,128 183,787
Other accrued liabilities 143,277 96,828
------------ ------------
Total current liabilities 1,536,310 819,109
STOCKHOLDERS' EQUITY: (Note C)
Common stock, $.05 par value 201,980 201,980
Additional paid-in capital 10,796,081 10,796,081
Accumulated deficit (5,076,335) (4,646,825)
------------ ------------
Total stockholders' equity 5,921,726 6,351,236
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
------------ ------------
$ 7,458,036 $ 7,170,345
============ ============
</TABLE>
The balance sheet at June 30, 1998 has been derived from the audited financial
statements at that date.
See notes to financial statements.
3
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DOTRONIX, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
REVENUE: $ 1,741,732 $ 2,840,577
OPERATING EXPENSES:
Cost of Sales 1,204,184 2,089,859
Selling, general
and administrative 952,885 828,861
Interest 14,173 60,684
----------- -----------
Net loss $ (429,510) $ (138,827)
=========== ===========
Loss per common share,
basic(Note D) $ (0.11) $ (0.03)
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Loss per common share assuming dilution (Note D)
$ (0.11) $ (0.03)
----------- -----------
Average number of common
shares outstanding 4,039,601 4,037,170
----------- -----------
</TABLE>
See notes to financial statements.
4
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DOTRONIX, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
September 30,
-------------------------
1998 1997
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (429,510) $ (138,827)
Adjustments to reconcile net loss to
cash used in operating activities:
Provision for loss on accounts receivable -- 10,000
Provision for inventory obsolescence 40,000 40,000
Depreciation and amortization 61,198 45,448
Changes in assets and liabilities:
Accounts receivable (244,286) (52,903)
Inventories 274,324 43,605
Prepaid expenses (45,262) 2,995
Other assets 10,666 (17,500)
Accounts payable and accrued liabilities 88,588 (33,234)
----------- -----------
Net cash used in
operating activities (244,282) (100,416)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (25,339) (15,864)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock -- (3,300)
Borrowings on revolving and demand loans 2,130,184 2,974,120
Repayments on revolving and demand loans (1,501,571) (2,792,455)
----------- -----------
Net cash provided by financing activities 628,613 178,365
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NET INCREASE IN CASH AND CASH EQUIVALENTS 358,992 62,085
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD 290,578 2,582,679
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CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 649,570 $ 2,644,764
=========== ===========
See notes to financial statements
5
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DOTRONIX, INC.
NOTES TO FINANCIAL STATEMENTS
Unaudited
A. Basis of Presentation
The balance sheet as of September 30, 1998, the statements of operations for the
three month periods ended September 30, 1998 and 1997 and the statements of cash
flows for the three month periods ended September 30, 1998 and 1997 have been
prepared by the Company without audit. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position, results of operations and cash flows at September
30, 1998 and for the period ended September 30, 1998 and 1997 presented herein
have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Company's financial statements and notes thereto
included in the Annual Report on Form 10-KSB of the Company for the fiscal year
ended June 30, 1998.
B. Earnings per share
Effective December 15, 1997 the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). Earnings per
share amounts presented for the three month period ended September 30, 1997 have
been restated for the adoption of SFAS No. 128. The following table reflects the
calculation of basic and diluted earnings per share.
Three months Three months
September, 30 September, 30
1998 1997
------------- -------------
Loss per share
Net loss $ (429,510) $ (138,827)
Weighted average shares outstanding 4,039,601 4,037,170
Net loss per share - basic $ (0.11) $ (0.03)
========== ==========
Loss per share - assuming dilution
Net loss $ (429,510) $ (138,827)
Weighted average shares outstanding 4,039,601 4,037,170
Dilutive impact of options outstanding 0 0
---------- ----------
Weighted average shares and potential
dilutive shares outstanding 4,039,601 4,037,170
Loss per share - assuming dilution $ (0.11) $ (0.03)
========== ==========
Options to purchase 142,000 shares of common stock at exercise prices of $.78 to
$2.54 were outstanding during the three months ended September 30, 1998, and
options to purchase 143,000 shares of common stock at exercise prices of $.78 to
$2.54 were outstanding during the three months ended September 30, 1997, but
were not included in the computation of diluted earnings per share because of
their anti-dilutive impact on the loss per share.
6
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
RESULTS OF OPERATIONS
Revenue decreased 39% for the quarter ended September 30, 1998 compared to the
quarter ended September 30, 1997. Revenue was down in the quarter due to reduced
shipments of medical OEM monitors. In addition, revenue during the first quarter
of fiscal 1998 contained revenue from a flight information system that was
installed during fiscal 1998.
Gross margin percentage for the quarter was 31% compared to 32% for the quarter
ended September 30, 1997. The Company's product mix in the first quarter of
fiscal 1999 was the primary contributing factor in the reduced gross margin
results in the quarter.
Selling, general and administrative expenses increased $124,000 or 15% for the
quarter. The increase was caused by increased engineering effort on new product
designs as well as an increase in marketing and sales efforts in pursuit of new
markets.
Interest expense decreased $47,000 the three month period ended September 30,
1998. The establishment of a new financing agreement which is discussed under
"Liquidity and Capital Resources" resulted in the lower borrowings and financing
costs.
LIQUIDITY AND CAPITAL RESOURCES
On November 13, 1997, the Company entered into a working capital loan and
security agreement with Coast Business Credit. The agreement covers a period of
three years with the following provisions:
o Maximum availability of $3,000,000 not to exceed the total of 85% of
eligible receivables, as defined, plus outstanding equipment acquisition
loans. The capital equipment acquisition loans can not exceed $500,000.
o The loans bear interest at 2% over prime (10.5% at September 30, 1998) and
are secured by all the assets of the Company. The agreement also provides
for minimum interest payments on loans balances of $600,000 in year one,
$900,000 in year two and $1,200,000 in year three.
o Payment of $1,250 quarterly loan facility fee.
o Early termination fees of $90,000 the first year, $60,000 the second year
and $30,000 in the third year.
o The maintenance of a minimum tangible net worth as defined, of $5,000,000.
The Company believes that the cash and cash equivalents on hand at September 30,
1998 and the future amounts available to it under the aforementioned credit
agreement should be adequate to meet both short and long-term capital needs. The
Company's tangible net worth at September 30, 1998 was $5,257,000. The Company
will seek to negotiate with the lender if it's tangible net worth falls below
the minimum of $5,000,000 as defined in the credit agreement.
During the three months ended September 30, 1998, operations consumed $244,000
of cash. Purchases of property, plant and equipment consumed $25,000 of cash.
Increased borrowings on the working capital loan provided $629,000 of cash to
the Company. The overall result was an increase in cash of $359,000.
At September 30, 1998, working capital amounted to $4,150,000.
7
<PAGE>
IMPACT OF THE YEAR 2000 ON THE COMPANY'S INFORMATION TECHNOLOGY SYSTEMS.
The Company's products are not impacted by the year 2000 issue since the
displays/monitors that the Company designs and manufacturers do not contain date
logic as part of their operation.
The Company's business systems; consisting of manufacturing requirements
planning (MRP) and accounting systems (accounts receivable, accounts payable,
general ledger) are not year 2000 compliant. To comply with the year 2000 issue,
the Company has plans to replace the existing business system. As of September
30, 1998, the supplier of the replacement system has been selected. This
supplier, along with internal Company resources, will install the new system
with an implementation date of January 1, 1999.
In fiscal year 1998 the Company retained an external consultant to assist in the
selection and implementation of the replacement business system. The consultant
has been the only incremental cost that the Company has incurred. The total cost
through September 30, 1998 for the implementation effort has been $22,500, which
has been expensed. It is anticipated that the acquisition cost of the hardware
and software with the related costs of conversion, training, and support will
total approximately $300,000.
The Company intends to finance the acquisition of this system through a multiple
year lease arrangement. It is anticipated that the non-recurring transition
costs will be financed through the use of the Company's available operating cash
flow and advances under its line of credit.
The current systems implementation plan has a planning buffer of 6 months. The
Company can continue to operate on the existing system through June 30, 1999. At
July 1, 1999, when the fiscal year becomes June 30, 2000, the business systems
would not function in their intended manner. The Company feels that the buffer
period of 6 months is sufficient to address unplanned issues and/or greater
complexity with respect to the Company's use of the replacement system.
8
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit 27........Financial Data Schedule
(b) No reports on Form 8-K were issued during the quarter.
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.
Date: November 4, 1998 DOTRONIX, INC.
By /s/ William S. Sadler
---------------------------
William S. Sadler
President
(Principal Executive Officer)
By /s/ Erling J. Anderson
---------------------------
Erling J. Anderson
Chief Financial Officer
(Principal Financial and accounting Officer)
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 649,570
<SECURITIES> 0
<RECEIVABLES> 1,422,719
<ALLOWANCES> (36,588)
<INVENTORY> 3,590,413
<CURRENT-ASSETS> 5,686,700
<PP&E> 6,969,811
<DEPRECIATION> (5,590,492)
<TOTAL-ASSETS> 7,458,036
<CURRENT-LIABILITIES> 1,536,310
<BONDS> 0
0
0
<COMMON> 201,980
<OTHER-SE> 5,719,746
<TOTAL-LIABILITY-AND-EQUITY> 7,458,036
<SALES> 1,735,046
<TOTAL-REVENUES> 1,741,732
<CGS> 1,204,184
<TOTAL-COSTS> 952,885
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,173
<INCOME-PRETAX> (429,510)
<INCOME-TAX> 0
<INCOME-CONTINUING> (429,510)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (429,510)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
