<PAGE>
CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR COMMISSION
ENDED JUNE 30, 1999 FILE NO. 0-9996
DOTRONIX, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1387074
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
160 FIRST STREET S.E.
NEW BRIGHTON, MINNESOTA 55112-7894
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 633-1742
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK
$.05 PAR VALUE
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 .
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ X ]
State issuer's revenues for its most recent fiscal year: $7,670,428
The aggregate market value of common equity stock held by nonaffiliates of the
registrant as of August 31, 1999 was approximately $1,585,000 (based on the last
sale price of such stock as reported by the OTC Bulletin Board.)
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The number of shares outstanding of the registrants common stock, as of August
31, 1999 was 4,057,601.
A portion of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders is incorporated into Part III as set forth therein.
PART I
This Form 10-KSB contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. For this purpose any
statements contained in this Form 10-KSB that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue" or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors, many of which are not within the Company's control. These
factors include but are not limited to economic conditions generally and in the
industries in which the Company's customers participate; competition within the
Company's industry, including competition from much larger competitors;
technological advances which could render the Company's products less
competitive or obsolete; failure by the Company successfully to develop new
products or to anticipate current or prospective customers' product needs; price
increases or supply limitations for components purchased by the Company for use
in its products; and delays, reductions, or cancellations of orders previously
placed with the Company.
ITEM 1. BUSINESS
GENERAL
Dotronix, Inc. (the "Company") was founded in 1980 for the purpose of designing,
manufacturing and marketing cathode ray tube ("CRT") displays and closed circuit
television ("CCTV") monitors. Such displays and monitors are used to display
alphanumeric information, graphics and images in a broad range of applications.
These applications range from use in relatively simple information systems, such
as airline flight information displays, to much more sophisticated systems such
as computer-aided design, manufacturing and engineering ("CAD/CAM/CAE") systems
and medical diagnostic imaging systems.
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The image on a CRT display or CCTV monitor is produced by magnetically guiding
an interruptible stream of electrons against the back of a phosphorescent
screen. When the stream of electrons strikes the back of the screen a bright
area is produced, and when it is interrupted a dark area appears. In a
medium-resolution unit the stream of electrons scans the screen of 525
horizontal lines 30 times per second, so that the series of light and dark areas
produced appears as a steady coherent image to the viewer. High-resolution
displays scan a greater number of lines, in some instances at greater speed,
thus producing a clearer image on the screen.
PRODUCTS
The Company primarily designs, manufactures and markets monitors and displays
for a wide range of end user applications for the medical diagnostic,
transportation, and multimedia presentation and display markets.
The medical market products consist primarily of high resolution monochrome and
color displays marketed to the major Original Equipment Manufacturers (OEM)
within the market. This OEM base serves x-ray, CT scan, MRI and other
instrumentation uses. The medical products are used in diagnostic and work
station applications and for fixed and portable instrumentation devices. CRT
sizes range from 5" to 21".
The Company also markets a product line of large screen color displays in the
multimedia arena. Product uses include video walls, displays for flight
information systems, and other public information displays. Products range from
20" to 32". The Company has added gas plasma flat panels to its product line in
fiscal 1999.
The Company continues to selectively market to the federal government and its
agencies, offering high quality, medium resolution, color and monochrome
displays.
Although the Company has developed standardized CRT displays in order to provide
cost-effective products, it also works closely with customers and suppliers in
order to adapt existing designs and incorporate new products, including flat
panel displays, in meeting customers' specific requirements.
MARKETING
The Company believes that the market for CRT displays and CCTV monitors is
extensive and diverse. As described above, CRT displays and CCTV monitors are
used in a wide variety of computer-based information systems and video-based
systems. The Company's principal marketing effort is directed toward the OEMs of
the various systems in which displays and monitors are used. Company personnel
work with these OEMs in order to determine the OEMs' technical needs and cost
objectives and to adapt the Company's designs accordingly. This adaptation
process typically entails specification of the components to be used within the
Company's standard design in order to meet these needs and objectives. Greater
degrees of customization are required, however, for certain display
applications.
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The Company's present customer base consists of approximately 200 OEMs and
system integrators located predominantly in the United States, with 4% of the
Company's revenues during the year ended June 30, 1999 consisting of sales to
customers in Europe, Canada, and the Far East. Sales to the Company's three
largest customers accounted for 25% of its revenues during the year ended June
30, 1999. Three separate customers have accounted for 10% or more of revenues
during one or more of the last three fiscal years. Their respective percentages
of revenue by fiscal year are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Customer A 10% 0% 0%
Customer B 8% 12% 8%
Customer C 7% 9% 14%
</TABLE>
In order to meet the diverse requirements of OEMs, the Company markets its
products directly to such manufacturers through its own technically trained
sales employees. The Company employs salespersons in St. Paul, Minnesota, Los
Angeles, California and Eatontown, New Jersey. The Company's CRT displays and
CCTV monitors are priced in the range from $100 to $10,000, depending on size
and other specifications, degree of adaptation required and quantity.
COMPETITION
The Company believes that competition in the market for CRT displays and CCTV
monitors is generally based on price, product performance, product availability
and customer service. A number of other domestic and foreign companies,
including Panasonic Company, Sony, Tatung Company, Conrac Corporation,
Tektronix, Inc., Philips Electronics, Ltd., and Mitsubishi Electronic
Corporation, presently manufacture CRT displays and CCTV monitors and market
them to OEMs. In addition, some OEMs produce their own CRT displays and CCTV
monitors. Many of the companies in CRT display and CCTV monitor market have
substantially greater resources than the Company.
The Company also faces potential competition from other, non-CRT based
information display technologies, such as liquid crystal displays and other
flat-panel displays. The Company believes, however that such alternative
technologies have not yet proven economical and effective in most applications
in which the Company's products are used. The development of an economical and
effective flat-panel display could have an adverse effect on the Company's
business; therefore, the Company is following developments closely and
evaluating the potential use of this technology in its product lines. As
previously noted, the Company has added gas plasma flat panels to its product
line for customer applications such as flight information display systems and
point of purchase advertising.
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MANUFACTURING AND SUPPLIERS
The Company purchases the components of its CRT displays and CCTV monitors from
outside suppliers and manufactures, assembles, and tests these components at its
New Brighton, Minnesota and Eau Claire, Wisconsin facilities. The Company has
begun to purchase completed CRT displays offshore in an effort to improve its
competitive position. The components of CRT displays and CCTV monitors include
standardized CRTs, magnetic deflection yokes and transformers, power sources and
other standardized electronic components as well as printed circuit boards and
chassis manufactured to the Company's specifications. The Company believes that
such standardized components generally are available from more than one source
of supply and that numerous manufacturers of components to specification are
available. In the manufacturing process transistors, capacitors and other
electronic components are inserted into holes drilled in a printed circuit
board. The components are then flow-soldered to the circuit board and then the
CRT, deflection yoke and the power source are mounted on the chassis and hand
wired. The completed units are then put through a series of quality control
tests plus a burn-in period before shipment to the customer.
GOVERNMENT REGULATIONS
The Company's products, or products into which they are incorporated, must be
certified by officials of the Department of Health and Human Services as
complying with regulations limiting the amount of radiation that may be emitted
by CRT displays and CCTV monitors. The Company has been able to obtain such
approvals without material delay. The Company has received exemption from
certain of the certification procedures under an exception contained in the
regulations which reduces the administrative burden of such certification
procedures. In addition, the Company's products are subject to Federal
Communications Commission regulations limiting the amount of radio noise
emissions from computing devices. The Company has been able to obtain the
necessary certifications in a timely manner.
PERSONNEL
As of June 30, 1999 the Company had 91 full-time employees. The Company believes
that its relationship with its employees is satisfactory. None of the Company's
employees are covered by collective bargaining agreements.
SALES BACKLOG; RESEARCH AND DEVELOPMENT
The Company's sales backlog expected to be shipped by the end of the following
fiscal year was approximately $0.9 million at June 30, 1999 and $1.7 million at
June 30, 1998. The Company believes that the dollar amount of backlog at a given
date is not necessarily indicative of sales for any succeeding period. For
example, certain regular customers of the Company place frequent orders on a
short term basis only.
Research and development costs totaled approximately $518,000 for fiscal 1999,
$399,000 for fiscal 1998 and $302,000 for fiscal 1997.
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ITEM 2. PROPERTIES
The Company's corporate offices and certain manufacturing operations are
located in a building that is approximately 17,000 square feet in New
Brighton, Minnesota. The building was purchased from the Company by William
S. Sadler, president and a major stockholder of the Company, and leased by
him to the Company, if fiscal 1999. Rental payments are $6,100 per month
through April 2004. From May 2004 to April 2009 rent is $2,500 per month plus
an additional amount equal to the monthly payments of principal and interest
on a 15 year loan (at June 30, 1999 a rate of 7.9%) for $456,000 (the
Additional Rent), obtained by Mr. Sadler, with total monthly payments no to
be less than $6,100. At June 30, 1999, the additional rent would have been
$3,720 per month. The lease agreement has two five year options with rental
payments of $3,000 plus Additional Rent and $3,500 plus Additional Rent,
respectively. In addition to the rental amounts described above, the Company
is responsible for all other costs, fees, expenses, and other charges which
may arise. These lease terms were approved by the Company's outside directors
based on a study of comparable rental properties.
The Company also leases in New Brighton under a five year lease that expires
March 2003, approximately 22,000 square feet of warehouse space from a company
wholly owned by William S. Sadler, at a rental rate of $4,932 per month. The
lease has a renewal option for five additional years at the same rate. These
lease terms were approved by the Company's outside directors based on a study of
comparable rental properties.
The Company utilizes, on a month to month rental basis, approximately 4,500
square feet in New Brighton, Minnesota at $2,185 per month, from another
company, wholly owned by William S. Sadler.
The Company's office and manufacturing facility in Eau Claire, Wisconsin is
located in an approximately 33,600 square foot building owned by the Company.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
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. The following table sets forth the range
of high and low closing sales prices of the Common Stock as reported by NASDAQ.
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<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1999 HIGH LOW
<S> <C> <C>
First Quarter............................. $ 1-1/2 $1-1/32
Second Quarter............................ 1-7/32 3/4
Third Quarter............................. 1-5/16 3/4
Fourth Quarter............................ 7/8 5/8
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1998 HIGH LOW
<S> <C> <C>
First Quarter............................. $1-1/8 $7/8
Second Quarter............................ 1-3/16 7/8
Third Quarter............................. 2 1
Fourth Quarter............................ 2 1-1/8
</TABLE>
As of June 30, 1999, there were 354 record holders of the Company's Common
Stock. The Company has not paid dividends on its Common Stock and does not
expect to pay cash dividends for the foreseeable future. The Company's current
borrowing arrangement prohibits the payment of cash dividends. The Company's
current policy is to retain any earnings to finance operations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION:
The Company experienced revenue declines in fiscal 1999 and 1998 and had net
losses of $2.04 million, $1.03 million, and $1.42 million in fiscal 1999, 1998,
and 1997 respectively. As a result of these net losses, 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 the 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.
In addition, 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. See Note H of the financial
statements included elsewhere herein.
The Company also is considering several strategies for decreasing its expense
structure to a level more nearly commensurate with its current revenues, as well
as for increasing
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revenues. The strategies for reducing expenses could include workforce
reductions or the closing of facilities, either of which could result in certain
one-time charges to earnings.
There is no assurance that the Company will be able to raise the funds, through
new credit facilities or otherwise, required to repay the borrowings outstanding
under its revolving credit agreement or that it will be able to reduce or
eliminate its net losses.
RESULTS OF OPERATIONS:
The Company's revenues decreased $1,599,459 (17%) and $682,926 (7%) during the
fiscal year ended June 30, 1999 and 1998 from the respective preceding fiscal
years. The decrease for fiscal 1999 was caused by a continuing decline in OEM
and video wall shipments. The decrease for fiscal 1998 was mainly due to
decreased video wall shipments with a slight reduction experienced in the
medical OEM market.
Five customers comprised 38% of the total fiscal 1999 sales of the Company. In
fiscal 1998 and 1997 these same customers comprised 29% and 31% of sales,
respectively.
The Company's gross margin was 24% , 30% and 25% in fiscal 1999, 1998, and 1997,
respectively. The deterioration in fiscal 1999 was primarily due to lower usage
of capacity and the research and development costs associated with the
introduction of several new models. The improvement in fiscal 1998 was primarily
due to a more favorable product mix and reduced manufacturing expenses.
Selling, general, and administrative expenses increased 2% in fiscal 1999 and 2%
in fiscal 1998, from their respective preceding fiscal years. Both years
increases were due to sales and related costs associated with new product
introductions.
Interest expense decreased 24% in fiscal 1999 and 55% in fiscal 1998, from the
respective preceding fiscal years. The decrease for both years was caused by
reduced borrowing levels and the securing of a new credit facility with reduced
interest rates.
As of June 30, 1999 the Company had available income tax operating loss
carryforwards of approximately $3,900,000 that can be used to offset future
taxable income. The Company has recorded a valuation allowance against all
benefits associated with net operating loss carryforwards as it is less probable
than not that they will ultimately be realized.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The Company believes that its revenues and results of operations have not been
significantly affected by inflation during the three years ended June 30, 1999.
The Company's transactions are denominated in U.S. dollars. For this reason the
Company does not have significant exposure to foreign exchange rate
fluctuations.
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The Company's working capital loan and the operating lease on its headquarters
are subject to variable interest rates. Significant fluctuations in interest
rates therefore could have an adverse effect on the Company and its ability to
fund working capital requirements.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES:
On November 13, 1997, the Company entered into a working capital loan and
security agreement (the Credit Agreement) with Coast Business Credit (Coast).
The original Credit Facility covers a period of three years with the following
provisions:
- - Maximum availability of $3,000,000 not to exceed 85% of eligible
receivables, as defined, plus outstanding equipment acquisition loans. The
capital equipment acquisition loans can not exceed $500,000. Borrowings are
secured by substantially all the assets of the Company other than its real
property.
- - Interest at 2% to 5% over prime (12.75% at June 30, 1999) depending upon
compliance with covenants. The Credit Agreement also provides for minimum
interest payments on loan balances of $600,000 in year one, $900,000 in
year two and $1,200,000 in year three.
- - Payment of a $1,250 quarterly loan facility fee.
- - Early termination fees of $90,000 the first year, $60,000 the second year
and $30,000 in the third year.
- - Various restrictive covenants, including a minimum tangible net worth of
$5,000,000.
The Company's tangible net worth fell below the minimum of $5,000,000 in
December of 1998. Coast waived the minimum tangible net worth provision for
December 1998 and January 1999 for a fee of $5,000. Coast agreed to continue
waiver of the minimum tangible net worth provision in consideration of
increasing the interest rate on borrowed funds from 2% over prime to 5% over
prime. The increased rate was applied by Coast starting June 1, 1999.
On October 1, 1999, the Company was notified by Coast of their intent to
terminate the Credit Agreement effective December 31, 1999. No additional
borrowings are available from Coast after that date. Borrowings of $848,706 were
outstanding at the notification date. At December 31, 1999 borrowings and an
early termination fee of $30,000 will be due.
As discussed in the "Introduction" above, the Company is considering several
strategies for obtaining credit facilities to replace the Credit Agreement or
for raising the funds necessary to repay the amount outstanding thereunder.
However, there is no assurance that the Company will be able to raise the funds,
through new credit facilities or otherwise, required to repay the borrowings
outstanding under the Credit Agreement.
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At June 30, 1999 the Company had working capital of $2,867,899. As noted in
the "Introduction" above, during fiscal 1999, in order to improve liquidity
the Company engaged in a sale and leaseback of its New Brighton, Minnesota
headquarters building, realizing net cash proceeds approximately $559,000.
The gain on this sale was deferred and will be amortized over the life of the
lease (10 years). The Company believes that the cash and cash equivalents on
hand at June 30, 1999 should be adequate to meet short and long term needs,
provided that replacement credit facilities or other funding sources become
available or replace the Credit Agreement. The Company has no material
commitments for capital expenditures at June 30, 1999 and expects 2000
capital expenditures to be consistent with 1999.
During 1999 certain employees of the Company agreed to a decrease in salary for
an equal value of the Company's common stock. At June 30, 1999 $4,936,
representing 7,264 shares, has been recognized and accrued for this commitment.
During 1999 the Company entered into employment agreements with three employees
whereby stock will be granted on each of the employees' first three anniversary
dates. In 1999, the Company issued 26,000 shares of restricted common stock,
which vest 10,000 shares, 7,000 shares, 7,000 shares, and 2,000 shares in years
1999 through 2002 respectively. Compensation expense of $11,500 was recognized
during 1999, and unearned compensation of $15,875 is accrued at June 30, 1999.
CASH FLOW
During fiscal 1999 cash flow used in operating activities was $63,000. Two major
elements of the cash flow was a net loss of $2,040,000 partially offset by a
reduction in inventories of $1,511,000. Cash provided by investing activities of
approximately $559,000 was provided by the sale and leaseback of the Company's
headquarters, partially offset by purchases of equipment of $272,000. Cash
provided by financing activities was approximately $106,000 primarily related to
additional borrowing under the Company's Credit Agreement.
During fiscal 1998 cash flows used in operating activities were $915,000,
primarily related to the net loss of $1,026,000, partially offset by decreases
in accounts receivable and inventory of $675,000 and $609,000 respectively.
Purchases of equipment used approximately $158,000. Financing activities used
approximately $1,219,000 related to the repayment of debt.
During fiscal 1997 cash flows used in operating activities were $112,000,
primarily related to the net loss of $1,421,000. Purchases of equipment used
$49,000. Repayment of debt used $464,000 and equity transactions consisting of
stock repurchases required $199,000 of cash during fiscal 1997.
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting (SFAS) 130 "Reporting Comprehensive Income". SFAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, losses) in a full set of general-purpose
financial statements. SFAS 130 is not currently applicable to the Company
because the Company did not have any items of other comprehensive income in any
of the periods presented.
Also, in June 1997 the FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information", which was adopted by the Company in 1999.
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in their financial statements. SFAS
131 requires financial information to be reported on the basis that is used
internally for evaluating performance and deciding how to allocate resources.
The Company operates in one business segment, therefore, there was no change in
the Company's disclosures.
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.
YEAR 2000 COMPLIANCE
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 $406,000 of which $381,000 has been
capitalized. Additional costs to be incurred after June 30, 1999 are
approximately $25,000 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.
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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 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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are included (with an index listing all
such statements) in a separate financial section at the end of this Annual
Report on Form 10-KSB.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
See Part I of this report. Pursuant to General Instruction E(3), reference is
made to information contained under the heading "Election of Directors" in the
Company's definitive proxy statement for its 1999 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission on or before September
30, 1999, which information is incorporated herein.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company who are not also directors of the Company
are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert J. Andrews 56 Vice President, Operations
Robert V. Kling 57 Chief Financial Officer
</TABLE>
Robert J. Andrews has been Vice President, Operations of the Company since 1986.
He has been employed by the Company since 1982 as Operations Manager. Prior to
joining the Company, Mr. Andrews was the Director of Operations of Audiotronics
Corporation.
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Robert V. Kling has been Chief Financial Officer since February, 1999. Prior to
joining the Company Mr. Kling held positions as Controller and Chief Financial
Officer at various firms.
ITEM 10. EXECUTIVE COMPENSATION
Pursuant to General Instruction of E(3), reference is made to information
contained under the heading "Executive Compensation" in the Company's definitive
proxy statement for its 1999 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission on or before October 28, 1999, which
information is incorporated herein.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Pursuant to General Instruction E(3), reference is made to information contained
under the heading "Voting Securities and Principal Holders" in the Company's
definitive proxy statement for its 1999 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission on or before October 28, 1999,
which information is incorporated herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction E(3), reference is made to information contained
under the heading "Certain Transactions" in the Company's definitive proxy
statement for its 1999 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission on or before October 28, 1999, which
information is incorporated herein.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) LISTING OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
Number
- ------
<S> <C>
3.1 Articles of Incorporation, as amended to date of this report
(incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended June 30, 1988).
3.2 Bylaws of the Company (incorporated by reference to exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1991).
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4.1 Specimen certificate representing the Company's Common Stock
(incorporated by reference to exhibit 3(a) to Amendment No. 2 to the
Company's Registration Statement on Form S-18, File No. 2-71333C).
10.1 Amended and Restated Employment Agreement of William S. Sadler dated
July 1, 1998. (incorporated by reference to exhibit 10.1 to the
Company's Annual Report on Form 10-KSB for the year ended June 30,
1998).
10.2 Lease for land and building located at 60 Cleveland Avenue S.E., New
Brighton, Minnesota (incorporated by reference to exhibit 10.10 to the
Company's Annual Report on Form 10-KSB for the year ended June 30,
1993).
10.3 Amendment of Lease for land and building located at 50 Cleveland Avenue
S.E., New Brighton, Minnesota (incorporated by reference to exhibit
10.5 to the Company's Annual Report on Form 10-KSB for the year ended
June 30, 1993).
10.4 Dotronix, Inc. 1989 Stock Option and Restricted Stock Plan
(incorporated by reference to exhibit 10.9 to the Company's Annual
report on Form 10-K for the year ended June 30, 1990).
10.5 Loan and Security Agreement by and between the Company and Coast
Business Credit, a division of Southern Pacific Bank. Dated as of
November 13, 1997. (incorporated by reference to exhibit 10.5 to the
Company's Annual Report on Form 10-KSB for the year ended June 30,
1998).
10.6 Dotronix, Inc. Non-employee Director Stock Option Plan (incorporated by
reference to exhibit 10.9 to the Company's Annual Report on Form 10-KSB
for the year ended June 30, 1992).
10.7 Sale and leaseback of corporate headquarters located at 160 First
Street S.E. New Brighton, Minnesota (incorporated by reference to
exhibit 10a (Building purchase agreement, and exhibit 10b (Building
lease agreement) on Form 10-QSB for the quarter ended March 31, 1999.)
23 Independent Auditors' Consent (filed herewith).
27 Financial Data Schedule (filed herewith).
</TABLE>
(b) REPORTS ON FORM 8-K
No reports were filed on Form 8-K during the quarter ended June 30, 1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DOTRONIX, INC.
Date: October 12, 1999 By /s/ William S. Sadler
-------------------------------------------
William S. Sadler, President
Pursuant to 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.
Date Signature
- ---- ---------
October 12, 1999 By /s/ William S. Sadler
-------------------------------------------
William S. Sadler, President, Treasurer and
Director
October 12, 1999 By /s/ Robert V. Kling
-------------------------------------------
Robert V, Kling, Chief Financial Officer
October 12, 1999 By /s/ Ray L. Bergeson
-------------------------------------------
Ray L. Bergeson, Director
October 12, 1999 By /s/ Edward L. Zeman
-------------------------------------------
Edward L. Zeman, Director
October 12, 1999 By /s/ Robert J. Snow
-------------------------------------------
Robert J. Snow, Director
October 12, 1999 By /s/ L. Daniel Kuechenmeister
-------------------------------------------
L. Daniel Kuechenmeister, Director
15
<PAGE>
DOTRONIX, INC.
Index to Financial Statements
Independent auditors' report.............................................F-2
Balance sheets...........................................................F-3
Statements of operations.................................................F-4
Statements of stockholders' equity.......................................F-5
Statements of cash flows.................................................F-6
Notes to financial statements............................................F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND STOCKHOLDERS
DOTRONIX, INC.
NEW BRIGHTON, MINNESOTA
We have audited the accompanying balance sheets of Dotronix, Inc. (the Company)
as of June 30, 1999 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1999. 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 generally accepted auditing
standards. 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 1999 and 1998,
and the results of its operations and cash flows for each of the three years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles.
/S/Deloitte & Touche LLP
October 12 , 1999
Minneapolis, Minnesota
F-2
<PAGE>
BALANCE SHEETS
DOTRONIX, INC.
<TABLE>
<CAPTION>
June 30
-------------------------------
1999 1998
<S> <C> <C>
ASSETS (NOTE C)
CURRENT ASSETS
Cash and cash equivalents $ 621,414 $ 290,578
Accounts receivable, less allowable for doubtful
accounts of $36,588 in both years 1,352,065 1,141,845
Inventories (Note A) 2,393,605 3,904,737
Prepaid expenses 18,972 15,324
------------- -------------
Total current assets 4,386,056 5,352,484
PROPERTY, PLANT & EQUIPMENT (Notes A and B) 1,305,632 1,121,679
OTHER ASSETS:
Excess of cost over fair value of net assets
acquired, less amortization (Note A) 557,982 629,980
License agreement, less amortization (Note A) 25,000 35,000
Other 9,692 31,202
------------- -------------
Total assets $ 6,284,362 $ 7,170,345
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving loan (Note C) $ 398,167 $ 254,264
Current maturities - Capital lease obligations (Note C) 110,596
Accounts payable 664,106 284,230
Salaries, wages and payroll taxes 178,569 183,787
Current portion - deferred gain of sale of building
to related party (Note H) 47,613
Other accrued liabilities 119,106 96,828
------------- -------------
Total current liabilities 1,518,157 819,109
CAPITAL LEASE OBLIGATIONS (Note C) 32,215
DEFERRED GAIN ON SALE OF BUILDING TO
RELATED PARTY (Note H) 420,581
COMMITMENTS AND CONTINGENCIES (Notes D and H)
STOCKHOLDERS' EQUITY (Notes C and E):
Common stock, $.05 par value; 12,000,000 shares
authorized, 4,057,601 and 4,039,601 shares issued
and outstanding, respectively 202,880 201,980
Additional paid-in capital 10,812,928 10,796,081
Unearned compensation (15,875)
Accumulated deficit (6,686,524) (4,646,825)
------------- -------------
Total stockholders' equity 4,313,409 6,351,236
------------- -------------
Total liabilities and stockholders' equity $ 6,284,362 $ 7,170,345
------------- -------------
------------- -------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
STATEMENT OF OPERATIONS
DOTRONIX, INC.
<TABLE>
<CAPTION>
Year ended June 30
-------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
REVENUES (Note G) $ 7,670,428 $ 9,257,942 $ 9,940,868
COSTS AND EXPENSES:
Cost of sales 5,831,981 6,472,814 7,468,947
Selling, general and administrative 3,786,973 3,691,349 3,628,459
Interest expense 91,173 120,258 264,559
-------------- ------------- --------------
9,710,127 10,284,421 11,361,965
-------------- ------------- --------------
NET LOSS $ (2,039,699) $ (1,026,479) $ (1,421,097)
-------------- ------------- --------------
-------------- ------------- --------------
LOSS PER COMMON SHARE -
BASIC AND DILUTED $ (0.50) $ (0.25) $ (0.34)
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING -
BASIC AND DILUTED 4,057,601 4,038,564 4,157,233
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
DOTRONIX, INC.
<TABLE>
<CAPTION>
Common Stock Additional
---------------------- Paid-in Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT
JUNE 30, 1996 4,218,935 $ 210,947 $ 10,987,304 $(2,199,249) $ 8,999,002
Common stock issued 68,200 3,410 65,352 68,762
Common stock
repurchased (246,800) (12,340) (255,613) (267,953)
Net loss (1,421,097) (1,421,097)
---------- ---------- ------------ ----------- -----------
BALANCES AT
JUNE 30, 1997 4,040,335 202,017 10,797,043 (3,620,346) 7,378,714
Common stock issued 2,466 123 2,178 2,301
Common stock
repurchased (3,200) (160) (3,140) (3,300)
Net loss (1,026,479) (1,026,479)
---------- ---------- ------------ ----------- -----------
BALANCES AT
JUNE 30, 1998 4,039,601 201,980 10,796,081 (4,646,825) 6,351,236
Common stock issued 28,000 1,400 25,975 $ (15,875) 11,500
Common stock
repurchased (10,000) (500) (9,128) (9,628)
Net loss (2,039,699) (2,039,699)
---------- ---------- ------------ ---------- ----------- -----------
BALANCES AT
JUNE 30, 1999 4,057,601 $ 202,880 $ 10,812,928 $ (15,875) $(6,686,524) $ 4,313,409
---------- ---------- ------------ ---------- ----------- -----------
---------- ---------- ------------ ---------- ----------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
STATEMENTS OF CASH FLOWS
DOTRONIX, INC.
<TABLE>
<CAPTION>
Year ended June 30
-------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $ (2,039,699) $ (1,026,479) $ (1,421,097)
Adjustment to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 246,388 236,222 241,325
Gain on sale of property, plant and equipment 3,399
Provision for loss and accounts receivable 59,991 160,846
Stock compensation 11,500
Change in assets and liabilities:
Accounts receivable (210,220) 734,255 674,882
Inventories 1,511,132 (513,813) 608,823
Prepaid expenses (3,648) 57,279 7,182
Other assets 21,510 (30,477) 38,370
Accounts payable and accrued liabilities 379,876 (379,676) (125,668)
Salaries, wages and payroll taxes payable 17,060 (52,191) (296,993)
-------------- ------------- --------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (62,702) (914,889) (112,330)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (271,556) (157,614) (48,658)
Proceeds for sale of property, plant and equipment 558,665
Purchase of license agreement (50,000)
-------------- ------------- --------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 287,109 (157,614) (98,658)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,301 68,762
Repurchase of common stock (9,628) (3,300) (267,953)
Borrowings on revolving loan 7,642,866 8,959,176 10,170,384
Repayments on revolving loan (7,498,963) (10,177,775) (10,634,800)
Payments of capital lease obligations (27,846)
-------------- ------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 106,429 (1,219,598) (663,607)
-------------- ------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 330,836 (2,292,101) (874,595)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 290,578 2,582,679 3,457,274
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 621,414 $ 290,578 $ 2,582,679
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DOTRONIX, INC.
YEARS ENDED JUNE 30, 1999, 1998 AND 1997.
A. NATURE OF BUSINESS, MANAGEMENT PLANS, AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF BUSINESS:
The Company designs, manufactures and markets monochrome and color cathode ray
tube (CRT) displays and closed circuit television (CCTV) monitors for a broad
range of applications. CRT displays are used to display alphanumeric information
and graphics in market quotation systems, word processing systems,
computer-aided design, manufacturing and engineering (CAD/CAM/CAE) systems,
desktop publishing systems and other computer-based information systems. CCTV
monitors are used to display video images generated by medical imaging systems,
closed-circuit surveillance systems, studio monitor systems and other
video-based systems.
MANAGEMENT PLANS:
The Company experienced revenue declines in fiscal 1999 and 1998 and had net
losses of $2.04 million, $1.03 million, and $1.42 million in fiscal 1999, 1998,
and 1997 respectively. As a result of these net losses, 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, 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.
In addition, 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. See Note H of the financial
statements included elsewhere herein.
F-7
<PAGE>
The Company also is considering several strategies for decreasing its expense
structure to a level more nearly commensurate with its current revenues, as well
as for increasing revenues. The strategies for reducing expenses could include
workforce reductions or the closing of facilities, either of which could result
in certain one-time charges to earnings.
There is no assurance that the Company will be able to raise the funds, through
new credit facilities or otherwise, required to repay the borrowings outstanding
under its revolving credit agreement or that it will be able to reduce or
eliminate its net losses.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments with a maturity of
three months or less at original issue to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash, receivables, accounts payable, revolving debt, accrued expenses and other
liabilities are carried at amounts which reasonably approximate their fair value
due to the short-term nature of these amounts or due to variable rates of
interest which are consistent with current market rates.
F-8
<PAGE>
INVENTORIES:
Inventories are valued at the lower of cost (first-in, first-out method) or
market. Inventories consist of the following at June 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Raw materials $ 1,780,861 $ 2,975,987
Work-in-process 424,463 443,728
Finished goods 188,281 485,022
-------------- ---------------
Total inventory $ 2,393,605 $ 3,904,737
-------------- ---------------
-------------- ---------------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT:
Depreciation is provided using the straight-line method over estimated useful
lives of 25 years for buildings, five years for laboratory equipment, office
furniture and fixtures and three years for transportation equipment. Data
processing hardware and software will be depreciated over two to five years
beginning in October 1999 when put into service. Building improvements are
depreciated over the remaining useful life of the building at the time of the
improvement.
INTANGIBLE ASSETS:
Goodwill, related to the acquisition of a subsidiary which was merged into
Dotronix, Inc., is amortized using the straight-line method over a 20-year
period. Accumulated amortization against this asset was $882,000 and $810,000 at
June 30, 1999 and 1998, respectively.
In fiscal year 1997 the Company acquired license rights to a new product, for a
period of five years, at a cost of $50,000. This license is being amortized on a
straight-line basis over the 5-year license period. Accumulated amortization
against this asset was $25,000 and $15,000 at June 30, 1999 and 1998,
respectively.
RECOGNITION OF REVENUE:
The Company recognizes revenue upon shipment of products to the customer.
RESEARCH AND DEVELOPMENT:
Selling, general and administrative expenses include research and development
costs of approximately of $518,000, $399,000, and $302,000 for the years ended
June 30, 1999, 1998, and 1997, respectively.
EARNINGS (LOSS) PER COMMON SHARE:
Basic earnings (loss) per share is computed by dividing net loss by the weighted
average number of common shares outstanding. Diluted earnings per share assumes
the exercise of stock options and warrants using the treasury stock method, if
dilutive.
Because of the net loss in fiscal 1999, 1998 and 1997, all stock options have an
antidilutive effect and have been excluded from EPS calculations.
F-9
<PAGE>
ACCOUNTING ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS:
Management periodically reviews the carrying value of long-lived assets for
potential impairment by comparing the carrying value of these assets to the
estimated undiscounted future cash flows expected to result from the use of
these assets. Should the sum of the related expected future cash flows be less
than the carrying value, an impairment loss would be recognized. An impairment
loss would be measured by the amount by which the carrying value of the asset
exceeds the fair value of the asset with fair value being determined using
discounted cash flows. To date, management has determined that no impairment of
these assets exists.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 130 "Reporting Comprehensive Income." SFAS
130 establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains, losses) in a full set of
general-purpose financial statements. SFAS 130 is not currently applicable to
the Company because the Company did not have any items of other comprehensive
income in any of the periods presented.
Also, in June 1997 the FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information," which was adopted by the Company in 1999.
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in their financial statements. SFAS
131 requires financial information to be reported on the basis that is used
internally for evaluating performance and deciding how to allocate resources.
The Company operates in one business segment, therefore, there was no change in
the Company's disclosures.
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 provision 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.
F-10
<PAGE>
B. PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30
---------------------------------
1999 1998
---- ----
<S> <C> <C>
Land $ 175,000 $ 182,509
Building and building improvements 1,050,501 1,347,534
Machinery and laboratory equipment 3,380,189 3,375,872
Office furniture and fixtures 784,751 768,181
Data processing equipment 1,370,463 959,316
Transportation equipment 38,060 38,060
-------------- ---------------
6,798,964 6,671,472
Less: accumulated depreciation and
amortization 5,493,332 5,549,793
-------------- ---------------
$ 1,305,632 $ 1,121,679
-------------- ---------------
-------------- ---------------
</TABLE>
C. FINANCING ARRANGEMENTS AND CAPITAL OBLIGATIONS
FINANCING ARRANGEMENTS:
On November 13, 1997, the Company entered into a working capital loan and
security agreement (the Credit Agreement) with Coast Business Credit (Coast).
The original Credit Facility covers a period of three years with the following
provisions:
- - Maximum availability of $3,000,000 not to exceed 85% of eligible
receivables, as defined, plus outstanding equipment acquisition loans. The
capital equipment acquisition loans can not exceed $500,000. Borrowings are
secured by substantially all the assets of the Company other than its real
property.
- - Interest at 2% to 5% over prime (12.75% at June 30, 1999) depending upon
compliance with covenants. The Credit Agreement also provides for minimum
interest payments on loan balances of $600,000 in year one, $900,000 in
year two and $1,200,000 in year three.
- - Payment of a $1,250 quarterly loan facility fee.
- - Early termination fees of $90,000 the first year, $60,000 the second year
and $30,000 in the third year.
- - Various restrictive covenants, including a minimum tangible net worth of
$5,000,000.
The Company's tangible net worth fell below the minimum of $5,000,000 in
December of 1998. Coast waived the minimum tangible net worth provision for
December 1998 and January 1999 for a fee of $5,000. Coast agreed to continue
waiver of the minimum tangible net worth provision in consideration of
increasing the interest rate on borrowed funds from 2% over prime to 5% over
prime. The increased rate was applied by Coast starting June 1, 1999.
F-11
<PAGE>
Borrowing at June 30, 1999 were $398,166. On October 1, 1999, the Company was
notified by Coast of their intent to terminate Credit Agreement effective
December 31, 1999 No additional borrowings are available from Coast after that
date. Borrowings of $848,706 were outstanding at the notification date. At
December 31, 1999 borrowings and an early termination fee of $30,000 will be
due.
As discussed in Note A, the Company is considering several strategies to replace
the Credit Agreement. There is no guarantee that additional financing will be
available at terms acceptable to the Company.
CAPITAL LEASE OBLIGATIONS:
During 1999 the Company entered into a capital lease obligation for computer
hardware equipment. The lease obligation has an interest rate of 9 3/4% and
expires in January 2001. The cost of equipment under the capital lease
obligation was $170,657 at June 30, 1999. No amortization has been recorded as
the equipment was not placed into service until fiscal 2000. Payments due under
capital leases at June 30, 1999 are as follows:
<TABLE>
<S> <C>
Fiscal 2000 $ 116,725
Fiscal 2001 32,800
------------
149,525
Less: interest 6,714
------------
142,811
Current portion 110,596
------------
Long-term portion $ 32,215
------------
------------
</TABLE>
D. COMMITMENTS AND CONTINGENCIES
Warehouse facilities, office equipment, computer equipment and vehicles are
leased under noncancelable operating leases. Minimum future obligations on these
operating leases at June 30, 1999 are as follows:
<TABLE>
<S> <C>
Year ending June 30:
2000 $ 167,967
2001 146,968
2002 142,068
2003 117,588
2004, thereafter 427,000
--------------
$ 1,001,591
--------------
--------------
</TABLE>
Total operating lease and rent expense for the Company for the years ended June
30, 1999, 1998, and 1997 was $158,000, $156,000 and $180,000, respectively.
F-12
<PAGE>
The Amended and Restated Employment Agreement with the president and major
shareholder, dated July 1, 1998, provides for a base compensation of $15,000 per
month. In addition, subject to the Company's pretax earnings levels, a minimum
bonus of $150,000 each fiscal year is to be paid in cash. No bonuses were
incurred or expensed in fiscal years 1997, 1998 and 1999.
E. STOCKHOLDERS' EQUITY
The Company has an incentive stock option plan for employees for the granting of
options to purchase up to 500,000 shares of the Company's common stock. The
options generally vest ratably over six months and expire in ten years. All
options are granted at the closing market price on the date of grant. No options
were granted in 1999, 1998 or 1997; 85,612 options are outstanding at June 30,
1999.
The Company also has a Nonemployee Director Stock Option Plan for the granting
of options to nonemployee Directors to purchase up to 100,000 shares of the
Company's common stock. Each nonemployee director is automatically granted, on
the first business day following the Company's annual meeting, an option to
purchase 2,500 shares of common stock. New directors receive an initial option
grant following the first board meeting at which such director is elected of an
option to purchase 5,000 shares of common stock. The options vest over six
months and in ten years. All options are granted at the closing market price on
the date of grant. 10,000 options were granted in 1999, 1998 and 1997. 82,500
options are outstanding at June 30, 1999.
In addition, each nonemployee director is automatically granted, on the first
business day following the Company's annual meeting, 500 shares of common stock.
2,000 shares of common stock were granted in November 1998 and compensation
expense of $2,438, $1,938 and $2,500 was recorded related to these grants in
1999, 1998 and 1997, respectively.
A summary of the status of the Company's stock options is presented below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
Wgtd Avg Wgtd Avg Wgtd Avg
Shares Exer Price Shares Exer Price Shares Exer Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 167,943 $ 1.66 172,010 $ 1.66 258,832 $ 1.57
Granted 10,000 1.00 10,000 0.97 10,000 1.64
Exercised 0 0.00 (466) 0.78 (1,200) 1.05
Canceled (10,831) 1.69 (13,601) 1.06 (95,622) 1.42
--------- --------- ---------
Outstanding at end of year 167,112 1.66 167,943 1.70 172,010 1.66
--------- --------- ---------
--------- --------- ---------
Options exercisable at year end 167,112 1.66 141,723 1.57 144,900 1.55
</TABLE>
F-13
<PAGE>
The Company has elected to continue following the accounting guidance of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," for measurement and recognition of stock-based transactions with
employees. No compensation cost has been recognized for options issued under the
plans when the exercise price of the options is at least equal to the fair
market value of the common stock at the date of grant. Had compensation cost for
the stock options issued been determined based on the fair value at the grant
date, consistent with the provisions of SFAS No. 123, "Accounting For Stock
Based Compensation," the Company's 1999, 1998 and 1997 net income and earnings
per share would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net (loss) earnings:
As reported $(2,039,699) $(1,026,479) $(1,421,097)
Pro forma $(2,068,116) $(1,030,641) $(1,429,535)
Earnings per basic & diluted share:
As reported $ (.50) $ (.25) $ (.34)
Pro forma $(.51) $ (.26) $ (.34)
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions and results.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend yield None None None
Risk free interest rate 5% 5% 7%
Expected life 10 years 10 years 10 years
Expected volatility 65% 65% 53%
Expected fair value of options on grant date $3,733 $4,162 $8,438
</TABLE>
F-14
<PAGE>
The following table summarizes information about stock options outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------- ----------------
Remaining
Number Contractual Life Number
Outstanding (Years) Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
19,794 4.0 $0.78 19,794 $0.78
10,000 8.4 $0.97 10,000 $0.97
10,000 9.4 $1.00 10,000 $1.00
9,510 2.0 $1.19 9,510 $1.19
7,500 4.4 $1.25 7,500 $1.25
1,000 6.2 $1.25 1,000 $1.25
12,500 5.4 $1.31 12,500 $1.31
7,500 3.5 $1.56 7,500 $1.56
15,000 2.5 $1.63 15,000 $1.63
10,000 7.4 $1.64 10,000 $1.64
6,686 0.5 $2.13 6,686 $2.13
10,000 6.4 $2.13 10,000 $2.13
26,104 6.0 $2.31 26,104 $2.31
21,518 1.0 $2.54 21,518 $2.54
- -------------------------------------------------------------------------------------------
167,112 5.2 $1.67 167,112 $1.57
- -------------------------------------------------------------------------------------------
</TABLE>
During 1999 certain employees of the Company agreed to a decrease in salary for
an equal value of the Company's common stock. At June 30, 1999, $4,936,
representing 7,264 shares, has been recognized and accrued for this commitment.
During 1999 the Company entered into employment agreements with three employees
whereby stock will be granted on each of the employees' first three anniversary
dates. In 1999, the Company issued 26,000 shares of restricted common stock,
which vest 10,000, 7,000, 7,000 and 2,000 shares in 1999 through 2002,
respectively. Compensation expense of $11,500 was recognized during 1999, and
unearned compensation of $15,875 is accrued at June 30, 1999.
F-15
<PAGE>
F. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between the financial
statement and income tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the current period plus or minus the change
during the period in deferred tax assets and liabilities.
A reconciliation of the Company's income tax provision that would be provided
based on a statutory federal income tax rate of 35% to the Company's effective
rate is as follows:
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Computed tax (benefit) provision at
Federal tax rate $ (686,000) $ (359,000) $ (497,000)
Change in valuation allowance 639,000 322,000 470,000
Permanent differences 32,000 29,000 30,000
Graduated tax benefit 20,000 10,000 14,000
Other (5,000) (2,000) (17,000)
--------------- ------------- -------------
Provision (benefit) $ 0 $ 0 $ 0
--------------- ------------- -------------
--------------- ------------- -------------
</TABLE>
Deferred income taxes are provided for temporary differences between the
financial reporting and income tax basis of the Company's assets and
liabilities. Temporary differences, net operating loss carryforwards and
valuation allowances comprising the net deferred taxes on the balance sheets are
as follows:
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------------------
Assets Liabilities Total
------ ----------- -----
<S> <C> <C> <C>
Net operating loss carryforward $ 1,309,000 $ 1,309,000
Inventory 461,000 461,000
Tax credit carryforward 93,000 93,000
Sales leaseback gain 159,000 159,000
Accrued liabilities 64,000 64,000
Other 3,000 3,000
Valuation allowance (2,089,000) (2,089,000)
--------------- ------------- ----------------
$ 0 $ 0 $ 0
--------------- ------------- ----------------
--------------- ------------- ----------------
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------------------
Assets Liabilities Total
------ ----------- -----
<S> <C> <C> <C>
Net operating loss carryforward $ 833,000 $ 833,000
Inventory 465,000 465,000
Tax credit carryforward 93,000 93,000
Accrued liabilities 56,000 56,000
Other 6,000 $ (3,000) 3,000
Valuation allowance (1,450,000) (1,450,000)
--------------- ------------- ----------------
$ 3,000 $ (3,000) $ 0
--------------- ------------- ----------------
--------------- ------------- ----------------
</TABLE>
At June 30, 1999, the Company has federal income tax net operating loss
carryforwards of approximately $3,900,000 which will expire in 2019 and for
Minnesota income tax purposes has loss carryforwards of $1,380,000 which will
expire in 2004 through 2014. The Company also has general business tax credit
carryforwards of approximately $93,000 which will expire from fiscal 2002
through 2006.
G. SEGMENT, GEOGRAPHIC INFORMATION AND CONCENTRATIONS OF CREDIT RISK
The Company operates in one business segment producing cathode ray tube based
monitors and displays. Net sales located in geographic regions are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
United States $ 7,335,428 $ 8,516,942 $ 9,443,868
Foreign 335,000 741,000 497,000
-------------- -------------- ---------------
$ 7,670,428 $ 9,257,942 $ 9,940,868
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
The Company does not have assets outside of the United States.
F-17
<PAGE>
Three customers comprised 25% of the total 1999 revenues of the Company. In
fiscal years 1998 and 1997, these same customers comprised 17% and 22% of the
sales, respectively. The percentages of revenue by fiscal year are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Customer A 10% 0% 0%
Customer B 8 12 8
Customer C 7 9 14
</TABLE>
At June 30, 1999, one customer represented 43% of accounts receivable. At
June 30, 1998, three different customers represented an aggregate of 42% of
accounts receivable.
The Company is susceptible to various risks due to the nature of its business,
including customer-requested delays in shipments or cancellation of certain
orders.
H. RELATED-PARTY TRANSACTIONS
During 1999 the Company sold its headquarters in New Brighton, Minnesota to
the president and major stockholder of the Company for the net proceeds of
$559,000 and recorded at net gain of $476,000, which will be amortized over
the life of the lease. Simultaneously with the closing of the sale, the
Company entered into an operating lease with the president and major
stockholder whereby the Company will occupy the building through April 2009.
Rental payments are $6,100 per month through April 2004. From May 2004 to
April 2009 rent is $2,500 per month plus an additional amount equal to the
monthly payments of principal and interest on a 15-year loan (at June 30,
1999 a rate of 7.9%) for $456,000 (the Additional Rent), obtained by the
president and major stockholder of the Company, with total monthly payments
not to be less than $6,100. The lease agreement has two five-year options
with rental payments of $3,000 plus the Additional Rent and $3,500 plus the
Additional Rent, respectively. In addition to the rental amounts described
above, the Company is responsible for all other costs, fees, expenses and
other charges which may arise.
The Company also leases manufacturing and warehousing facilities owned by
companies that are owned by the president and major stockholder of the Company.
During the years ended June 30, 1999, 1998 and 1997, the Company incurred
approximately $98,000, $82,000 and $88,000 respectively for rental of these
manufacturing and warehousing facilities.
Operating commitments as of June 30, 1999 (Note D) include $942,000 of
obligations to the president and major stockholder of the Company.
F-18
<PAGE>
The Company has a patent license agreement with an employee of the Company to
manufacture and sell an automobile accessory product that had been developed and
patented by the employee. Under the terms of the license agreement, a payment of
$50,000 was made to the employee for exclusive rights to the product. In
addition, the Company is obligated to make additional royalty payments of 4% of
product sales over the term of the agreement. In fiscal 1999 and 1998 royalty
expense of $1,100 and $32,000, respectively, was incurred under the terms of
this agreement. If certain minimum levels of royalty payments are not made, the
agreement will automatically terminate.
I. RETIREMENT PLANS
The Company has a 401(k) retirement plan for all employees who elect to
participate once certain eligibility requirements are met. Each eligible
employee may elect to defer 1% to 15% of his or her compensation. The Company
may contribute an amount on behalf of each participant equal to a percentage of
each participant's compensation or an amount as determined each year by the
Board of Directors. Contributions to the plan by the Company were approximately
$42,000, $45,000 and $46,000 for the years ended June 30, 1999, 1998, and 1997,
respectively.
J. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow activities are as follows:
<TABLE>
<CAPTION>
June 30
------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Capital paid during the year for:
Interest $ 72,000 $ 120,000 $ 265,000
Income taxes 1,000 1,000 8,000
Investment and financing activities:
Equipment acquired by capital lease 170,657
Stock issued to employees per
employment agreements 24,937
Stock issued to directors 2,438 1,938 2,500
</TABLE>
F-19
<PAGE>
DOTRONIX, INC.
EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-KSB
FOR YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Exhibit Description
- ------- ----------- Page in
Number Form
- ------ ----
<S> <C> <C>
3.1 Articles of Incorporation, as amended to date of this
report(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended June 30, 1988).
3.2 Bylaws of the Company (incorporated by reference to exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1991.)
4.1 Specimen certificate representing the Company's Common Stock
(incorporated by reference to exhibit 3(a) to Amendment No. 2 to the
Company's Registration Statement on Form S-18, File No. 2-71333C).
10.1 Amended and Restated Employment Agreement of William S. Sadler dated
July 1, 1998 (incorporated by reference to exhibit 10.1 to the
Company's Annual Report on Form 10-KSB for the year ended June 30,
1998).
10.2 Lease for land and building located at 60 Cleveland Avenue S.E., New
Brighton, Minnesota (incorporated by reference to exhibit 10.10 to the
Company's Annual Report on Form 10-KSB for the year ended June 30,
1993).
10.3 Amendment of Lease for land and building located at 50 Cleveland Avenue
S.E., New Brighton, Minnesota (incorporated by reference to exhibit
10.5 to the Company's Annual Report on Form 10-KSB for the year ended
June 30, 1993).
10.4 Dotronix, Inc. 1989 Stock Option and Restricted Stock Plan
(incorporated by reference to exhibit 10.9 to the Company's Annual
report on Form 10-K for the year ended June 30, 1990).
10.5 Loan and Security Agreement by and between the Company and Coast
Business Credit, a division of Southern Pacific Bank. Dated as of
November 13, 1997. (incorporated by reference to exhibit 10.5 to the
Company's Annual Report on Form 10-KSB for the year ended June 30,
1998).
10.6 Dotronix, Inc. Non-employee Director Stock Option Plan (incorporated by
reference to exhibit 10.9 to the Company's Annual Report on Form 10-KSB
for the year ended June 30, 1992).
<PAGE>
10.7 Sale and leaseback of corporate headquarters located at 160 First
Street S.E. New Brighton, Minnesota (incorporated by reference to
exhibit 10a (Building purchase agreement, and exhibit 10b (Building
lease agreement) on Form 10-QSB for the quarter ended March 31, 1999.)
23 Independent Auditors' Consent (filed herewith).
27 Financial Data Schedule (filed herewith).
</TABLE>
<PAGE>
EX-23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 33-33702 of Dotronix, Inc. on Form S-8 and in Registration Statement
No. 33-46456 of Dotronix, Inc. on Form S-3 of our report dated October 12, 1999
appearing in the Annual Report on Form 10-KSB of Dotronix, Inc. for the year
ended June 30, 1999.
/s/ Deloitte & Touche LLP
October 12, 1999
Minneapolis, Minnesota
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999
<PERIOD-START> APR-01-1999 JUL-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 621,414 0
<SECURITIES> 0 0
<RECEIVABLES> 1,352,065 0
<ALLOWANCES> (36,588) 0
<INVENTORY> 2,393,605 0
<CURRENT-ASSETS> 4,386,056 0
<PP&E> 6,798,964 0
<DEPRECIATION> (5,493,332) 0
<TOTAL-ASSETS> 6,284,362 0
<CURRENT-LIABILITIES> 1,518,137 0
<BONDS> 0 0
0 0
0 0
<COMMON> 202,880 0
<OTHER-SE> 4,563,325 0
<TOTAL-LIABILITY-AND-EQUITY> 6,284,362 0
<SALES> 2,296,449 7,635,002
<TOTAL-REVENUES> 2,310,547 7,670,428
<CGS> 1,882,839 5,831,981
<TOTAL-COSTS> 2,867,580 9,618,954
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 43,417 91,173
<INCOME-PRETAX> (600,450) (2,039,699)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (600,450) (2,039,699)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (600,450) (2,039,699)
<EPS-BASIC> (.15) (.50)
<EPS-DILUTED> (.15) (.50)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998
<PERIOD-START> APR-01-1998 JUL-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 290,578 0
<SECURITIES> 0 0
<RECEIVABLES> 1,178,433 0
<ALLOWANCES> (36,588) 0
<INVENTORY> 3,904,737 0
<CURRENT-ASSETS> 5,352,485 0
<PP&E> 6,671,472 0
<DEPRECIATION> (5,549,793) 0
<TOTAL-ASSETS> 7,170,345 0
<CURRENT-LIABILITIES> 819,109 0
<BONDS> 0 0
0 0
0 0
<COMMON> 201,980 0
<OTHER-SE> 6,149,256 0
<TOTAL-LIABILITY-AND-EQUITY> 7,170,345 0
<SALES> 1,658,812 9,186,029
<TOTAL-REVENUES> 1,668,831 9,257,942
<CGS> 1,272,061 6,472,815
<TOTAL-COSTS> 2,202,319 10,164,163
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 20,827 120,258
<INCOME-PRETAX> (554,315) (1,026,479)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (554,315) (1,026,479)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (554,315) (1,026,479)
<EPS-BASIC> (.14) (.25)
<EPS-DILUTED> (.14) (.25)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> APR-01-1997 JUL-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 2,582,679 0
<SECURITIES> 0 0
<RECEIVABLES> 1,886,093 0
<ALLOWANCES> (136,597) 0
<INVENTORY> 3,550,924 0
<CURRENT-ASSETS> 8,092,299 0
<PP&E> 6,403,358 0
<DEPRECIATION> (5,395,569) 0
<TOTAL-ASSETS> 9,848,290 0
<CURRENT-LIABILITIES> 2,469,575 0
<BONDS> 0 0
0 0
0 0
<COMMON> 202,017 0
<OTHER-SE> 7,176,697 0
<TOTAL-LIABILITY-AND-EQUITY> 9,848,290 0
<SALES> 2,545,083 9,780,892
<TOTAL-REVENUES> 2,576,095 9,940,868
<CGS> 2,212,771 7,468,947
<TOTAL-COSTS> 3,037,968 11,097,406
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 69,921 264,559
<INCOME-PRETAX> (610,174) (1,421,097)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (610,174) (1,421,097)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (610,174) (1,421,097)
<EPS-BASIC> (.15) (.34)
<EPS-DILUTED> (.15) (.34)
</TABLE>
