<PAGE>
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 December 31, 1998 Commission File No. 0-9996
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DOTRONIX, INC.
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(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
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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 February 10, 1999
- ---------------------------- -----------------------------------------------
Common stock, par value 4,041,601 shares
$ .05 per share
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DOTRONIX, INC.
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INDEX
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Part I - Financial Information Page(s)
- ------------------------------ -------
Item 1. Financial Statements (Unaudited)
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7-9
Part II - Other Information
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Item 6. Exhibits and Reports on Form 8-K 10
EXHIBIT 27 - Financial Data Schedule 11
2
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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DOTRONIX, INC.
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BALANCE SHEETS
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<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
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(unaudited)
ASSETS
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<S> <C> <C>
Cash and cash equivalents $ 359,375 $ 290,578
Accounts receivable, less allowance for doubtful accounts of $36,588 1,207,235 1,141,845
Inventories:
Raw materials 2,334,075 2,975,987
Work-in-process 628,002 443,728
Finished goods 291,128 485,022
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Total inventories 3,153,205 3,904,737
Prepaid expenses 137,789 15,324
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Total Current Assets 4,857,604 5,352,484
PROPERTY, PLANT & EQUIPMENT
at cost net of accumulated depreciation of $5,632,891
and $5,549,793, respectively 1,070,615 1,121,679
OTHER ASSETS:
Excess of cost over fair value of net assets acquired, less
amortization of $845,973 and $809,974, respectively 593,981 629,980
Other 37,055 66,202
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TOTAL ASSETS $ 6,559,255 $ 7,170,345
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
Revolving loans $ 524,643 $ 254,264
Accounts payable 262,609 284,230
Salaries, wages and payroll taxes 127,826 183,787
Other accrued liabilities 95,014 96,828
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Total current liabilities 1,010,092 819,109
STOCKHOLDERS' EQUITY:
Common stock, $.05 par value 201,980 201,980
Additional paid-in capital 10,796,081 10,796,081
Accumulated deficit (5,448,898) (4,646,825)
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Total stockholders' equity 5,549,163 6,351,236
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 6,559,255 $ 7,170,345
============ ============
</TABLE>
See notes to financial statements
3
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DOTRONIX, INC.
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STATEMENTS OF OPERATIONS
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(Unaudited)
<TABLE>
<CAPTION>
Three months ended, Six months ended,
December 31 December 31
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 1,940,993 $ 2,422,264 $ 3,682,725 $ 5,262,841
OPERATING EXPENSES:
Cost of Sales 1,347,433 1,533,703 2,551,618 3,623,562
Selling, general
And administrative 946,008 863,156 1,898,892 1,692,017
Interest 20,115 15,989 34,288 76,673
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Net (loss) earnings $ (372,563) $ 9,416 $ (802,073) $(129, 411
=========== =========== =========== ===========
Basic and diluted (loss)
earnings per common share
(Note B) $ (0.09) $ 0.00 $ (0.20) $ (0.03)
----------- ----------- ----------- -----------
Average number of common
Shares outstanding 4, 040,666 4,038,178 4,040,134 4,037,674
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</TABLE>
See notes to financial statements
4
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DOTRONIX, INC.
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STATEMENTS OF CASH FLOWS
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(Unaudited)
Six months ended
December 31,
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (802,073) $ (129,411)
Adjustments to reconcile net loss to
Cash used in operating activities:
Provision for loss on accounts receivable -- ($ 100,009)
Provision for inventory obsolescence 79,994 79,999
Depreciation and amortization 124,097 91,303
Changes in assets and liabilities:
Accounts receivable (65,390) 1,047,142
Inventories 671,538 595,633
Prepaid expenses (122,465) 22,051
Other assets 24,147 (40,000)
Accounts payable and accrued liabilities (79,396) 34,705
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Net cash used in
Operating activities (169,548) (326,444)
CASH FLOWS FROM INVESTING ACTIVITIES-
Purchases of property, plant and equipment (32,034) (84,290)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock -- (1,362)
Borrowings on revolving and demand loans 3,921,003 4,904,119
Repayments on revolving and demand loans (3,650,624) (5,795,789)
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Net cash provided by (used in)
financing activities 270,379 (893,032)
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NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 68,797 $(1,303,766)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD 290,578 2,582,679
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CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 359,375 $ 1,278,913
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See notes to financial statements
5
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DOTRONIX, INC.
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NOTES TO FINANCIAL STATEMENTS
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Unaudited
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A. Basis of Presentation
The balance sheet as of December 31, 1998, the statements of operations for the
three and six month periods ended December 31, 1998 and 1997 and the statements
of cash flows for the six month periods ended December 31, 1998 and 1997 have
been prepared by the Company without audit. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position, results of operations and cash flows at December
31, 1998 and for the three and six months periods ended December 31, 1998 and
1997 presented herein have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Company's financial statements and notes thereto
included in the Annual Report on Form 10-KSB of the Company for the fiscal year
ended June 30, 1998.
B. Earnings per share
Effective December 15, 1997 the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). Earnings per
share amounts presented for the three and six month periods ended December 31,
1997 have been restated for the adoption of SFAS No. 128. The following table
reflects the calculation of basic and diluted earnings per share.
<TABLE>
<CAPTION>
Three months Three months Six months Six months
------------- ------------ ------------- -------------
December 31 December 31 December, 31 December, 31
------------- ------------ ------------- -------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Loss per share
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Net loss $ (372,563) $ 9,416 $ (802,073) $ (129,411)
Weighted average shares outstanding 4,040,666 4,038,178 4,040,134 4,037,674
Net loss per share - basic $ (0.09) $ 0.00 $ (0.20) $ (0.03)
========== ========== ========== ==========
Loss per share - assuming dilution
- ----------------------------------
Net loss $ (372,563) $ 9,416 $ (802,073) $ (129,411)
Weighted average shares outstanding 4,040,666 4,038,178 4,040,134 4,037,674
Dilutive impact of options outstanding $ 0.00 $ 0.00 $ 0.00 $ 0.00
========== ========== ========== ==========
Weighted average shares and potential
Dilutive shares outstanding 4,040,666 4,038,178 4,040,134 4,037,674
Loss per share - assuming dilution $ (0.09) $ 0.00 $ (0.20) $ (0.03)
========== ========== ========== ==========
</TABLE>
Options to purchase 138,000 shares of common stock at exercise prices of $.78 to
$2.54 were outstanding during the six months ended December 31, 1998, and
options to purchase 145,000 shares of common stock at exercise prices of $.78 to
$2.54 were outstanding during the six months ended December 31, 1997, but were
not included in the computation of diluted earnings per share because of their
anti-dilutive impact on the loss per share.
6
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Item 2. Management's Discussion and Analysis of Financial
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Condition and Results of Operations.
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RESULTS OF OPERATIONS
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Revenue decreased 20% and 30%, respectively for the three months and six months
ended December 31, 1998 compared to the prior year. Revenue was down in the
three and six month periods due to reduced shipments of medical OEM monitors. In
addition, revenue during the three and six month periods of fiscal 1998
contained revenue from a flight information system that was installed during
fiscal 1998.
Gross margin percentage for the quarter ended December 31, 1998 was 31% compared
to 34% for the same quarter ended in fiscal 1998. Gross margin for the six month
period ended December 31, 1998 was 31% compared to 31% in the prior year period.
The Company's product mix in the three months ended December 31, 1998 was the
primary contributing factor of the reduced gross margin results when compared to
the 1997 performance.
Selling, general and administrative expenses increased $83,000 or 10% for the
quarter and $207,000 or 12% for the six month period ending December 31, 1998
when compared to the prior year. The increase was caused by increased
engineering effort on new product designs as well as an increase in marketing
and sales efforts in pursuit of new markets.
Interest expense decreased $42,000 during the six month period ended December
31, 1998 compared to the same period of the prior year. The establishment of a
new financing agreement which is discussed under "Liquidity and Capital
Resources" resulted in lower financing costs.
LIQUIDITY AND CAPITAL RESOURCES
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On November 13, 1997, the Company entered into a working capital loan and
security agreement with Coast Business Credit. The agreement covers a period of
three years with the following provisions:
o Maximum availability of $3,000,000 not to exceed the total of 85% of
eligible receivables, as defined, plus outstanding equipment
acquisition loans. The capital equipment acquisition loans can not
exceed $500,000.
o The loans bear interest at 2% over prime (10.5% at December 31, 1998)
and are secured by all the assets of the Company. The 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.
o Payment of a $1,250 quarterly loan facility fee.
o Early termination fees of $90,000 the first year, $60,000 the second
year and $30,000 in the third year.
o The maintenance of a minimum tangible net worth as defined, of
$5,000,000.
The Company's tangible net worth at December 31, 1998 was $4,918,127, which is
below the $5,000,000 minimum tangible net worth as defined by the credit
agreement. The Lender has agreed to waive the minimum tangible net worth
provision for December 1998 and January 1999. The Lender has indicated that the
minimum tangible net worth loan provision will be a subject of discussion
between the Lender and the Company. If the Lender requires
7
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repayment of loans outstanding the Company will seek financing elsewhere. There
is no certainty that financing will be available. The Company believes that the
cash and cash equivalents on hand at December 31, 1998 and the future amounts
available to it under the aforementioned credit agreement or any other new
credit agreement should be adequate to meet both short and long-term capital
needs, including those discussed in the "Impact of the Year 2000" section which
follows.
During the six months ended December 31, 1998, operations consumed $170,000 of
cash. Purchases of property, plant and equipment consumed $32,000 of cash.
Increased borrowings on the working capital loan provided $270,000 of cash to
the Company. The overall result was an increase in cash of $69,000.
At December 31, 1998, working capital amounted to $3,848,000.
COMMON STOCK LISTING
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Effective January 19, 1999 the Company's common stock listing was moved from the
Nasdaq National Market to the Nasdaq SmallCap Market. Nasdaq has advised
Dotronix that the new listing is via an exception from Nasdaq's $1.00 minimum
bid requirement. Nasdaq also has advised Dotronix that in order to maintain the
new listing, on or before April 14, 1999, Dotronix must demonstrate a closing
day price of at least $1.00. Thereafter, the bid price must close at or above
$1.00 for a minimum of ten consecutive trading days.
IMPACT OF THE YEAR 2000 ON THE COMPANY'S INFORMATION TECHNOLOGY SYSTEMS.
- ------------------------------------------------------------------------
The Company's products are not impacted by the year 2000 issue since the
displays/monitors that the Company designs and manufacturers do not contain date
logic as part of their operation.
The Company's business systems; consisting of manufacturing requirements
planning (MRP) and accounting systems (accounts receivable, accounts payable,
general ledger) are not year 2000 compliant. To comply with the year 2000 issue,
the Company has plans to replace the existing business system. As of December
31, 1998, the supplier of the replacement system has been selected. This
supplier, along with internal Company resources, is presently installing the new
system with a completion date of April 30, 1999.
In fiscal year 1998 the Company retained an external consultant to assist in the
selection and implementation of the replacement business system. The total cost
through December 31, 1998 for the implementation effort has been $109,000 of
which $27,000 has been expensed. The remainder of the cost incurred is software
which will be capitalized. It is anticipated that the acquisition cost of the
hardware and software with the related costs of conversion, training, and
support will total approximately $350,000.
8
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The Company has financed the network and hardware portions (approximately
$160,000) of the implementation through a two year lease arrangement. It is
anticipated that the remaining costs of the implementation will be financed
through the use of the Company's available operating cash flow and advances
under its line of credit.
The current systems implementation plan has a planning buffer of two months. The
Company can continue to operate on the existing system through June 30, 1999. At
July 1, 1999, when the fiscal year becomes June 30, 2000, the business systems
will not function in their intended manner. The Company feels that the buffer
period of 2 months is sufficient to address unplanned issues and/or greater
complexity with respect to the Company's use of the replacement system.
9
<PAGE>
PART II - OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Securities Holders
At the annual meeting of the shareholders of the Company held on November 11,
1998 the following were elected directors:
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Votes For Withheld
- --------------------------------------------------------------------------------
William S. Sadler 3,651,832 66,605
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Ray L. Bergeson 3,651,632 66,805
- --------------------------------------------------------------------------------
Robert J. Snow 3,651,632 66,805
- --------------------------------------------------------------------------------
Edward L. Zeman 3,651,667 66,770
- --------------------------------------------------------------------------------
L. Daniel Kuechenmeister 3,651,667 66,770
- --------------------------------------------------------------------------------
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit 27........Financial Data Schedule
(b) No reports on Form 8-K were issued during the quarter.
SIGNATURES
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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: February 10, 1998 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)
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999
<PERIOD-START> OCT-01-1998 JUL-01-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 359,375 0
<SECURITIES> 0 0
<RECEIVABLES> 1,243,823 0
<ALLOWANCES> (36,588) 0
<INVENTORY> 3,153,205 0
<CURRENT-ASSETS> 4,857,604 0
<PP&E> 6,703,506 0
<DEPRECIATION> (5,632,891) 0
<TOTAL-ASSETS> 6,559,255 0
<CURRENT-LIABILITIES> 1,010,092 0
<BONDS> 0 0
0 0
0 0
<COMMON> 201,980 0
<OTHER-SE> 5,347,183 0
<TOTAL-LIABILITY-AND-EQUITY> 6,559,255 0
<SALES> 1,934,376 3,669,422
<TOTAL-REVENUES> 1,940,933 3,682,725
<CGS> 1,347,433 2,551,618
<TOTAL-COSTS> 946,008 1,898,892
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 20,115 34,288
<INCOME-PRETAX> (372,563) (802,073)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (372,563) (802,073)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (372,563) (802,073)
<EPS-PRIMARY> (0.09) (0.20)
<EPS-DILUTED> (0.09) (0.20)
</TABLE>
