<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, 1999 Commission File No. 0-9996
------
DOTRONIX, INC.
--------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1387074
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(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 26, 1999
- ----------------------- -------------------------------
Common stock, par value 4,073,762 shares
$ .05 per share
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DOTRONIX, INC.
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page(s)
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<S> <C>
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 1. Exhibits and Reports on Form 8-K 9
EXHIBIT 27 - Financial Data Schedule 10
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BALANCE SHEETS
DOTRONIX, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
ASSETS 1999 1999
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<S> <C> <C>
Cash and cash equivalents $ 310,742 $ 621,414
Accounts receivable, less allowance
for doubtful accounts of $36,588 at both dates 1,910,964 1,352,065
Inventories:
Raw materials 1,790,725 1,780,861
Work-in-process 347,023 424,463
Finished goods 219,965 188,281
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Total inventories 2,357,713 2,393,605
Prepaid expenses 109,194 18,972
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Total current assets 4,688,613 4,386,056
PROPERTY, PLANT & EQUIPMENT
at cost net of accumulated depreciation
of $5,531,716 and $5,493,332 respectively 1,314,474 1,305,632
OTHER ASSETS:
Excess of cost over fair value of net assets acquired,
less amortization of $891,774 and $809,974, respectively 539,983 557,982
License agreement, less amortization 22,500 25,000
Other 8,197 9,692
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TOTAL ASSETS $ 6,573,767 $ 6,284,362
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving loans $ 784,495 $ 398,167
Current maturities-capital lease obligations 71,183 110,596
Accounts payable 612,179 664,106
Salaries, wages and payroll taxes 122,221 178,569
Current portion-deferred gain on sale of building 47,613 47,613
Other accrued liabilities 182,663 119,106
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Total current liabilities 1,820,354 1,518,157
CAPITAL LEASE OBLIGATIONS 14,405 32,215
DEFERRED GAIN ON SALE OF BUILDING 408,678 420,581
STOCKHOLDERS' EQUITY:
Common stock, $.05 par value 202,880 202,880
Additional paid-in capital 10,812,928 10,812,928
Unearned compensation (15,875) (15,875)
Accumulated deficit (6,669,603) (6,686,524)
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Total stockholders' equity 4,330,330 4,313,409
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 6,573,767 $ 6,284,362
===================== ====================
</TABLE>
See notes to financial statements
3
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STATEMENTS OF OPERATIONS
DOTRONIX, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
SEPTEMBER 30
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1999 1998
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<S> <C> <C>
REVENUES $ 2,569,143 $ 1,741,732
OPERATING EXPENSES:
Cost of sales 1,701,845 1,204,184
Selling, general and
administrative 821,918 952,885
Interest 28,459 14,173
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Net income (loss) $ 16,921 $ (429,510)
================== ================
Basic and diluted income (loss)
per common share
(Note B) $ 0.00 $ (0.11)
Average number of common
shares outstanding - basic and
diluted 4,057,601 4,039,601
</TABLE>
See notes to financial statements
4
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STATEMENTS OF CASH FLOWS
DOTRONIX, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
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1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 16,921 $ (429,510)
Adjustment to reconcile net income ( loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 58,883 61,198
Amortization of deferred gain on sale of building (11,903)
Change in assets and liabilities:
Accounts receivable (558,899) (244,286)
Inventories 35,892 314,324
Prepaid expenses (90,222) (45,262)
Other assets 1,495 10,666
Accounts payable and accrued liabilities 11,630 70,247
Salaries, wages and payroll taxes payable (56,348) 18,341
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NET CASH USED IN OPERATING ACTIVITIES (592,551) (244,282)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (47,226) (25,339)
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NET CASH USED IN INVESTING ACTIVITIES (47,226) (25,339)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving loan 2,395,890 2,130,184
Repayments on revolving loan (2,009,562) (1,501,571)
Payments of capital lease obligations (57,223)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 329,105 628,613
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NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (310,672) 358,992
CASH AND CASH EQUIVALENTS AT
BEGINNING OF THE PERIOD 621,414 290,578
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CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 310,742 $ 649,570
============== ==============
</TABLE>
See notes to financial statements
5
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DOTRONIX, INC.
NOTES TO FINANCIAL STATEMENTS
A. Basis of Presentation
The balance sheet as of September 30, 1999, the statements of operations for the
three month periods ended September 30, 1999 and 1998 and the statements of cash
flows for the three month periods ended September 30, 1999 and 1998 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, 1999 and for the three months periods ended September 30, 1999 and 1998
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, 1999.
B. Earnings per share
The following table reflects the calculation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
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September 30 (1) September 30 (2)
1999 1998
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<S> <C> <C>
EARNINGS (LOSS) PER SHARE - BASIC
Net income (loss) $16,921 ($429,510)
Weighted average shares outstanding 4,057,601 4,039,306
Net income (loss) per share - basic $0.00 ($0.11)
=====================================
EARNINGS (LOSS) PER SHARE - ASSUMING
DILUTION
Net income (loss) $16,921 ($429,510)
Weighted average shares outstanding 4,057,601 4,039,306
Dilutive impact of options outstanding 0 0
Weighted average shares and potential
Dilutive shares outstanding 4,057,601 4,039,306
Net income (loss) per share - assuming dilution $0.00 ($0.11)
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</TABLE>
(1) The effect of stock options have been excluded from calculation of earnings
per share for the three months ended September 30, 1999 as the average
trading price of the Company's common stock during the period was less than
the exercise price.
(2) The effect of stock options have been excluded from calculation of earnings
per share for the three months ended September 30, 1998 as their effect is
antidilutive.
6
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C. Liquidity
The Company has not met the tangible net worth covenant in its revolving credit
agreement since December 1998. On October 1, 1999 the lender under this
agreement notified the Company of its intent to terminate the agreement and to
require repayment of the borrowings thereunder plus an early termination fee of
$30,000 effective December 31, 1999. At October 1, 1999, borrowing under this
agreement totaled $848,706. Substantially all of the Company's assets, other
than its real property, are pledged to secure the borrowings under this
agreement.
The Company's president and major stockholder has agreed to provide up to
$1,000,000 in secured financing to the Company in form of cash loans or
guarantees on Company borrowings. This agreement expires on September 30, 2000,
or upon sale of the Company and provides for the issuance of warrants to
purchase one share of common stock, at market value at the date of the advance,
for each four dollars loaned to the Company.
The Company is considering several strategies for obtaining credit facilities to
replace this revolving credit agreement or for raising the funds necessary to
repay the amount outstanding thereunder. The strategies under consideration
include engaging in a sale and leaseback of the Company's Eau Claire, Wisconsin
facility. During fiscal 1999, in order to improve liquidity the Company engaged
in a sale and leaseback of its New Brighton, Minnesota headquarters building
with the Company president, who is also a major stockholder.
ITEM2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue increased by $827,000 or 47% for the three months ended September 30,
1999 compared to the prior year. New products shipments were largely responsible
for the increase.
Gross margin percentage for the quarter ended September 30, 1999 was 33%
compared to 30% for the same quarter ended in fiscal 1998. Offshore purchasing
of major components and higher margins for new products contributed to the
increase in gross margin percentage.
Selling, general, administrative, and engineering expenses decreased $330,000 or
13% in the quarter ended September 30, 1999, when compared to the prior year.
The decrease was due to reductions in personnel and the completion of a major
product development effort in fiscal 1999.
Interest expense increased $14,826, or 104% during the three month period
ended September 30, 1999 compared to the same period of the prior year.
Increased average borrowings and a higher average interest rate caused the
increase in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company has not met the tangible net worth covenant in its revolving credit
agreement since December 1998. On October 1, 1999 the lender under this
agreement notified the Company of its intent to terminate the agreement and to
require repayment of the borrowings thereunder plus an early termination fee of
$30,000 effective December 31, 1999. At October 1, 1999, borrowing under this
7
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agreement totaled $848,706. Substantially all of the Company's assets, other
than its real property, are pledged to secure the borrowings under this
agreement.
The Company's president and major stockholder has agreed to provide up to
$1,000,000 in secured financing to the Company in form of cash loans or
guarantees on Company borrowings. This agreement expires on September 30, 2000,
or upon sale of the Company and provides for the issuance of warrants to
purchase one share of common stock, at market value at the date of the advance,
for each four dollars loaned to the Company.
The Company is considering several strategies for obtaining credit facilities to
replace this revolving credit agreement or for raising the funds necessary to
repay the amount outstanding thereunder. The strategies under consideration
include engaging in a sale and leaseback of the Company's Eau Claire, Wisconsin
facility. During fiscal 1999, in order to improve liquidity the Company engaged
in a sale and leaseback of its New Brighton, Minnesota headquarters building
with the Company president, who is also a major stockholder.
During the three months ended September 30, 1999, operations consumed $593,000
of cash. Purchases of property, plant and equipment consumed $47,000 of cash.
Payment of capital lease obligations consumed $57,000 of cash. Increased
borrowings on the working capital loan provided $386,000 of cash to the Company.
The overall result was an decrease in cash of $311,000.
COMMON STOCK LISTING
The Company's Common Stock previously was quoted on the NASDAQ Stock Market
under the symbol "DOTX". Effective August 4, 1999 the Company's Common Stock
transferred to the OTC Bulletin Board.
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.
To comply with the year 2000 issue, the Company purchased year 2000 ready
hardware and software (per vendor readiness documents) in September 1998. Total
estimated cost of the purchase is $433,000 of which $398,000 has been
capitalized. Additional costs to be incurred after September 30, 1999 are
approximately $10,000 which will be financed through the use of the Company's
available operating cash flow.
Installation and training have been ongoing since January 15, 1999. Several
pilot runs were completed through August 31, 1999. Final data transfer and
implementation of processes was completed on October 4, 1999, whereupon the
system became operational. The hardware vendor has assured the Company that the
installed hardware is Year 2000 ready. The software vendor has assured the
Company that its software release running as of October 4, 1999 is Year 2000
ready. The hardware vendor and the software vendor are both well established
companies with a long history of successful client installations. The Company
believes that the hardware and software vendors will support their products
under all contingencies.
In August 1999 the Company began a written evaluation of its suppliers. Letters
requesting information of Year 2000 readiness were sent or faxed to all key
suppliers. A substantial majority of suppliers
8
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responded that they were Year 2000 ready and products and services would not be
delayed due to Year 2000 problems. No suppliers responded that they were not
Year 2000 ready. The Company has continued to contact the non-responding
suppliers to determine their Year 2000 readiness. For a majority of the
Company's critical materials, alternative suppliers are available if current
suppliers experience Year 2000 difficulties. The Company has a long history of
re-engineering products on short notice because of the unexpected unavailability
of parts.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities". This Statement requires companies to record derivatives
on the balance sheet as assets and liabilities, measured at fair value. Gains or
losses resulting from changes in the value of those derivatives would be
accounted for depending on the use of the derivatives and whether it qualifies
for hedge accounting. Management has not yet completed an assessment of the
impact of adopting the provisions of SFAS 133 on the Company's financial
statements. This statement is effective for fiscal years beginning after June
15, 2000. The Company will adopt this accounting standard as required in fiscal
2001.
PART II - OTHER INFORMATION
Item 1. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit 27........Financial Data Schedule
Exhibit 10.8......Agreement To Issue Warrants
(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 12, 1999 DOTRONIX, INC.
By /s/ William S. Sadler
--------------------------------
William S. Sadler
President
(Principal Executive
Officer)
By /s/ Robert V. Kling
--------------------------------
Robert V. Kling
Chief Financial Officer
(Principal Financial
and accounting Officer)
9
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AGREEMENT TO ISSUE WARRANTS
This agreement is entered into on October 12, 1999, by and
between Dotronix, Inc., a Minnesota corporation (the "Company"), and William S.
Sadler ("Sadler").
Sadler hereby commits to provide up to $1,000,000 in financing
to the Company in the manner and on the terms set forth in the Company's Annual
Report on Form 10-KSB for the fiscal year ended June 30, 1999. This commitment
shall expire on the earlier of September 30, 2000, or the sale of the Company.
The Company hereby agrees that for every $4 of financing that
is provided by Sadler to the Company pursuant to the foregoing commitment, the
Company will issue to Sadler a warrant to purchase one share of the Company's
common stock, $0.05 par value.
The exercise price per share under each such warrant shall be
the closing market price per share of the Company's common stock on the day that
Sadler provides such financing to the Company. The exercise price shall be
payable only in cash.
Each such warrant shall become exercisable at the earliest
time permitted under applicable law and shall cease to be exercisable 10 years
after the date of issuance.
Such warrants shall be transferable only pursuant to the laws
of descent and distribution.
In witness whereof, the parties have executed this agreement
on the date first set forth above.
DOTRONIX, INC.
By /s/ Robert V. Kling
-------------------------
Its Chief Financial Officer
/s/ William S. Sadler
-----------------------------
William S. Sadler
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 310,742
<SECURITIES> 0
<RECEIVABLES> 1,947,552
<ALLOWANCES> (36,588)
<INVENTORY> 2,357,713
<CURRENT-ASSETS> 4,688,613
<PP&E> 6,846,190
<DEPRECIATION> (5,531,716)
<TOTAL-ASSETS> 6,573,767
<CURRENT-LIABILITIES> 1,820,354
<BONDS> 0
0
0
<COMMON> 202,880
<OTHER-SE> 4,127,450
<TOTAL-LIABILITY-AND-EQUITY> 6,573,767
<SALES> 2,550,531
<TOTAL-REVENUES> 2,569,143
<CGS> 1,701,845
<TOTAL-COSTS> 821,918
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,459
<INCOME-PRETAX> 16,921
<INCOME-TAX> 0
<INCOME-CONTINUING> 16,921
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,921
<EPS-BASIC> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
