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1
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, 2000 FILE NO. 0-9996
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 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
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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: $7,354,703
The aggregate market value of common equity stock held by nonaffiliates of the
registrant as of August 31, 2000 was approximately $510,630 (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, 2000 was 4,074,732.
A portion of the Registrant's Proxy Statement for the 2000 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.
The image on a electronic display can be produced by several different methods,
such as CRT displays, electronic light modulators which project the image, gas
plasma displays which use a technology similar to florescent light bulbs, and
direct view LCD and LED displays. Dotronix, Inc. engineers have experience in
all of these technologies.
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PRODUCTS
The Company primarily designs, manufactures and distributes monitors and
displays for a wide range of end user applications for the medical diagnostic,
transportation, and multimedia presentation and display markets. The Company is
also incorporating strategies into its business model which are intended to
enable it to provide turn key solutions to customers with display and
presentation problems which go beyond simple plug and play unintelligent CRT
devices.
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
workstation applications and for fixed and portable instrumentation devices. CRT
sizes range from five inches to twenty-one inches.
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
twenty inches to fifty inches.
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 is intent on providing turn-key solutions to
electronic display problems in a wide variety of industries. Two new computer
based systems using interactive touch panel display technology are being
marketed for use in point of purchase display systems in major retail stores,
and multilingual way finding display systems for use in airports and large
commercial buildings, including office buildings and hotels. To date efforts to
market these products have not produced material revenues.
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 for its CRT products 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 OEM CRT products customer base consists of approximately
225 OEMs and system integrators located predominantly in the United States. 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 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.
5% of the Company's revenues during the year ended June 30, 2000 consisted of
sales to customers in Europe, Canada, and the Far East.
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>
2000 1999 1998
----------------------------------------
<S> <C> <C> <C>
Customer A 17% 7% 9%
Customer B 5% 10% 0%
Customer C 4% 8% 12%
</TABLE>
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 the CRT display and CCTV monitor markets have
substantially greater resources than the Company.
The Company's solution to non-CRT base display technologies is to becoming a
distributor for the manufacturers of such displays, including liquid crystal
displays and other plasma panel displays. The Company has secured written and
oral pricing agreements which will enable it to achieve reasonable margins on
several such products.
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 Eau
Claire, Wisconsin facilities. The Company also purchases completed CRT displays
offshore in order 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 supplier and
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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. Finally, completed units are put through a series of quality control
tests plus a burn-in period before shipment to the customer.
The Company has established supplier relationships with the manufacturers of the
new technology displays including plasma panels, liquid crystal displays, and
light modulator projection displays.
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, 2000 the Company had 53 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 $2.1 million at June 30, 2000 and $0.9 million at
June 30, 1999. 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.
The Company has maintained manufacturing capacity for some products which have
experienced a decline in volume over the previous several years. The cost of
maintaining this capacity is beginning to exceed the contribution to profits of
these products at the current order levels. The Company has notified relevant
customers of its intent to discontinue maintenance of manufacturing capacity for
several low volume products. The result of the customer notification has been
order bookings in the high six figure range. The increase in sales resulting
from these orders is expected to be temporary. After these orders are filled,
the Company may determine to reduce capacity accordingly.
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Research and development costs totaled approximately $247,000 for fiscal 2000,
$518,000 for fiscal 1999 and $399,000 for fiscal 1998.
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, in 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, 2000 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, 2000, the additional rent would have been $3720 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'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, 2000 High Low
------------------------------- -----------------------
<S> <C> <C>
First Quarter $0.94 $0.44
Second Quarter 0.63 0.20
Third Quarter 0.81 0.22
Fourth Quarter 0.56 0.25
Fiscal Year Ended June 30, 1999 High Low
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First Quarter $1.50 $1.03
Second Quarter 1.22 0.75
Third Quarter 1.32 0.75
Fourth Quarter 0.88 0.63
</TABLE>
As of June 30, 2000, there were 340 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
RESULTS OF OPERATIONS:
The Company's revenues decreased $315,725 (4%) and $1,587,514 (17%) during the
fiscal years ended June 30, 2000 and 1999 from the respective preceding fiscal
years. The decrease for fiscal 2000 was attributable to small decreases across
several product lines. The decrease for fiscal 1999 was mainly due to decreased
video wall shipments with a slight reduction experienced in the medical OEM
market.
Five customers comprised 40% of the total fiscal 2000 sales of the Company. In
fiscal 1999 and 1998 these same customers comprised 32% and 18% of sales,
respectively.
The Company's gross margin was 28%, 24% and 30% in fiscal 2000, 1999, and 1998,
respectively. The increase in fiscal 2000 was due to a reduction in factory
personnel to align capacity with usage. The decline in fiscal 1999 was primarily
due to lower usage of capacity.
Selling, general, and administrative expenses decreased 14% in fiscal 2000 and
increased 2% in fiscal 1999, from their respective preceding fiscal years. The
decrease in fiscal 2000 was due to a company wide restructuring initiative which
reduced full time employees from 91 to 53 at June 30, 2000. The increase in
fiscal 1999 was due to sales and related costs associated with new product
introductions.
Interest expense increased 45% in fiscal 2000 and decreased 24% in fiscal 1999,
from the respective preceding fiscal years. The increase in fiscal 2000 was due
to a rate increase due to a net worth covenant exception in December 1999. In
February of 2000 that credit
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agency was replaced by another lender which required the issuance of
warrants, for which an interest charge of $20,000 was incurred in fiscal
2000. The decrease in fiscal 1999 was caused by reduced borrowing levels and
the securing of a new credit facility in November 1997 with reduced interest
rates.
As of June 30, 2000 the Company had available income tax operating loss
carryforwards of approximately $4,850,000 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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
On February 23, 2000, the Company entered into a revolving credit facility with
its president and major stockholder, and in September 2000 the Company's
president and major stockholder agreed to extend the loan agreement to February
28, 2002, and to increase the loan limit to $1,250,000 in secured financing. The
revolving credit facility contains various restrictive covenants including a
minimum tangible net worth balance of $2.0 million. As of September 27, 2000 the
Company had $832,317 available under the agreed to extension of the revolving
credit facility.
Interest on outstanding borrowings under the revolving credit facility is
accrued at the U.S. Prime interest rate plus 3%. Additionally, the Company is
required to issue warrants on the Company's stock to the president and major
shareholder for incremental increases in the outstanding borrowings balance. One
warrant is issued for every $4 in incremental borrowings made by the Company.
All warrants issued expire in 4 years and have an exercise price equal to the
fair market value of the Company's stock at the date of grant. Once repayments
on the facility have been made, additional warrants are issued for incremental
borrowings on the facility only to the extent that the new outstanding
borrowings balance exceeds the previous high outstanding borrowings balance. The
Company recognizes interest expense for the fair value of the warrants, which is
measured consistent with the provisions of SFAS 123, "Accounting for Stock Based
Compensation." The fair value of all warrants granted was estimated on the date
of grant using the Black-Scholes pricing model based on the following
assumptions:
<TABLE>
<CAPTION>
2000
----
<S> <C>
Dividend yield None
Risk free interest rate 6.54%
Expected life 4 years
Expected volatility 109%
</TABLE>
There was a total of 142,703 warrants issued in 2000 with a weighted average
exercise price of $0.56, and a weighted average remaining life of 3.69 years at
June 30, 2000. The fair value of the warrants totaled approximately $60,000
which is being amortized over the term of the loan agreement. The Company
recorded interest expense for the year ended June 30, 2000 of approximately
$20,000 related to the warrants.
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In 2000 and 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, 2000 and
1999, the Company had accrued $47,459 (137,006 shares) and $4,936 (7,264
shares), respectively, for this commitment.
In 1999, the Company entered into employment agreements with three employees
whereby 26,000 shares of restricted stock were granted. One third of the stock
vests on each of the employees' first three anniversary dates. In 1999 10,000
shares vested and 7,000 shares vested in 2000. Of the remaining 9,000 shares,
7,000 shares and 2000 shares are scheduled to vest in 2001 and 2002,
respectively. Compensation expense of $6,750 and $11,500 was recognized in 2000
and 1999, respectively. The Company has accrued unearned compensation of $9,125
at June 30, 2000 and $15,875 at June 30, 1999 related to these agreements.
Company management believes that the cash and cash equivalents on hand at
September 27, 2000 and future amounts available under the aforementioned credit
agreement should be adequate to meet both short term and long term cash
requirements.
CASH FLOW
During fiscal 2000 cash flow used in operating activities was $398,000. A net
loss of $1,318,000 was partially offset by depreciation and amortization of
approximately $282,000 and a reduction in inventories and accounts receivables
of $436,000. Cash of $93,000 was used to purchase equipment. Financing
activities used approximately $54,000, primarily for the repayment of debt.
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
totaled approximately $287,000. Approximately $559,000 was provided by the sale
and leaseback of the Company's headquarters, which was partially offset by
purchases of equipment of $272,000. Cash provided by financing activities was
approximately $106,000, primarily related to additional borrowings 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. Purchases of equipment used
approximately $158,000. Financing activities used approximately $1,219,000
related to the repayment of debt.
NEW ACCOUNTING PRONOUNCEMENTS
Effective July 1, 2000 the Company adopted Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS
No. 138 an amendment of SFAS No.133. These statements did not have a material
impact on the Company's results of operations, financial position or cash flows.
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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, 2000.
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.
The Company's working capital loan is 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
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 2000 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission on or before October 31,
2000, 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 57 Vice President, Operations
Robert V. Kling 58 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 2000 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission on or before October 31, 2000, 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 2000 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission on or before October 31, 2000,
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 2000 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission on or before October 31, 2000, which
information is incorporated herein.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) LISTING OF EXHIBITS
Exhibit
Number Description
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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).
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.)
10.8 Loan and security agreements by and between the Company and William
S.Sadler, dated February 23, 2000 (incorporated by reference to
exhibit 10.1 on Form 10-QSB for the quarter ended March 31, 2000.)
10.9 1999 Employee Stock Incentive Plan (incorporated by reference to
Appendix A to the Company's definitive proxy statement filed October
28, 1999)
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10.10 1999 Non-employee Director Stock Option and Stock Grant Plan
(incorporated by reference to Appendix B to the Company's definitive
proxy statement filed October 28, 1999)
23 Independent Auditors' Consent (filed herewith).
27 Financial Data Schedule (filed herewith).
(b) REPORTS ON FORM 8-K
No reports were filed on Form 8-K during the quarter ended June 30,
2000
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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: September 27, 2000 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
September 27, 2000 By /s/ William S. Sadler
---------------------------------------
William S. Sadler, President, Treasurer and
Director
September 27, 2000 By /s/ Robert V. Kling
----------------------------------------
Robert V. Kling, Chief Financial Officer
By /s/
---------------------------
Ray L. Bergeson, Director
September 27, 2000 By /s/ Edward L. Zeman
---------------------------
Edward L. Zeman, Director
September 27, 2000 By /s/ L. Daniel Kuechenmeister
----------------------------------------
L. Daniel Kuechenmeister, Director
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DOTRONIX, INC.
Index to Financial Statements
<TABLE>
<S> <C>
Independent auditors' report..................................Page 16
Balance sheets................................................Page 17
Statements of operations......................................Page 18
Statements of stockholders' equity............................Page 19
Statements of cash flows......................................Page 20
Notes to financial statements.................................Page 21
</TABLE>
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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, 2000 and 1999, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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, 2000 and 1999,
and the results of its operations and cash flows for each of the three years in
the period ended June 30, 2000, in conformity with auditing standards generally
accepted in the United States of America.
/s/Deloitte & Touche LLP
September 27, 2000
Minneapolis, Minnesota
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BALANCE SHEETS
DOTRONIX, INC.
JUNE 30, 2000 BALANCE SHEET
<TABLE>
<CAPTION>
CURRENT ASSETS: June 30, 2000 June 30, 1999
--------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 75,466 $ 621,414
Accounts receivable, less allowance for doubtful
accounts of $28,893 and $36,588 respectively 1,261,012 1,352,065
Inventories (Note A) 2,048,963 2,393,605
Prepaid expenses 47,359 18,972
--------------- ---------------
TOTAL CURRENT ASSETS 3,432,800 4,386,056
PROPERTY, PLANT & EQUIPMENT (Notes A and B) 1,158,422 1,305,632
OTHER ASSETS:
Excess of cost over fair value of net assets
acquired, less amortization (Note A) 485,984 557,982
License agreement, less amortization (Note A) 15,000 25,000
Other 400 9,692
--------------- ---------------
$ 5,092,606 $ 6,284,362
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving loan from a related party (Note C) $ 453,328 $ 398,167
Current maturities - capital lease obligations (Note C) 33,256 110,596
Accounts payable 725,404 664,106
Salaries, wages and payroll taxes 214,264 178,569
Current portion - deferred gain of sale of building
to related party (Note H) 47,613 47,613
Other accrued liabilities 172,106 119,106
--------------- ---------------
TOTAL CURRENT LIABILITIES 1,645,971 1,518,157
CAPITAL LEASE OBLIGATIONS (Note C) -- 32,215
DEFERRED GAIN ON SALE OF BUILDING TO RELATED PARTY (Note H) 372,968 420,581
COMMITMENTS AND CONTINGENCIES (Notes D, H, and I) -- --
STOCKHOLDERS' EQUITY (Notes C and E):
Common stock, $.05 par value 12,000,000
shares authorized, 4,074,732 and 4,057,601
shares issued and outstanding, respectively 203,737 202,880
Additional paid-in capital 10,883,778 10,812,928
Unearned compensation (9,125) (15,875)
Accumulated deficit (8,004,723) (6,686,524)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 3,073,667 4,313,409
--------------- ---------------
$ 5,092,606 $ 6,284,362
=============== ===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
18
STATEMENTS OF OPERATIONS
DOTRONIX, INC.
<TABLE>
<CAPTION>
Year ended June 30
------------------------------
2000 1999 1998
----------------- ------------------ -----------------
<S> <C> <C> <C>
REVENUES (Note G) $ 7,354,703 $ 7,670,428 $ 9,257,942
COSTS AND EXPENSES:
Cost of sales 5,302,332 5,831,981 6,472,814
Selling, general, and administrative 3,238,601 3,786,973 3,691,349
Interest expense 131,969 91,173 120,258
----------------- ------------------ -----------------
8,672,902 9,710,127 10,284,421
----------------- ------------------ -----------------
NET LOSS $ (1,318,199) $ (2,039,699) $ (1,026,479)
================= ================== =================
LOSS PER COMMON SHARE - BASIC
& DILUTED $ (0.32) $ (0.50) $ (0.25)
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC &
DILUTED 4,068,279 4,057,601 4,038,564
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
19
STATEMENTS OF STOCKHOLDERS' EQUITY
DOTRONIX, INC.
<TABLE>
<CAPTION>
Common Additional
Stock Paid-in Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Common stock issued 17,131 857 10,850 11,707
Warrants issued 60,000 60,000
Amoritzation of unearned
compensation 6,750 6,750
Net loss (1,318,199) (1,318,199)
-----------------------------------------------------------------------------------
BALANCES AT
June 30, 2000 4,074,732 $ 203,737 $ 10,883,778 $ (9,125) $ (8,004,723) $ 3,073,667
===================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
20
STATEMENTS OF CASH FLOWS
DOTRONIX, INC.
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------------------
2000 1999 1998
-----------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,318,199) $ (2,039,699) $ (1,026,479)
Adjustment to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 281,744 246,388 236,222
Gain on sale of property, plant, and equipment - 3,399
Provision for loss and accounts receivable - - 59,991
Stock compensation 11,707 11,500
Change in assets and liabilities:
Accounts receivable 91,053 (210,220) 734,255
Inventories 344,642 1,511,132 (513,813)
Prepaid expenses 31,613 (3,648) 57,279
Other assets 9,292 21,510 (30,477)
Accounts payable and accrued liabilities 114,298 379,876 (379,676)
Salaries, wages and payroll taxes payable 35,695 17,060 (52,191)
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (398,155) (62,702) (914,889)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (93,399) (271,556) (157,614)
Proceeds for sale of property, plant & equipment - 558,665
-----------------------------------------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (93,399) 287,109 (157,614)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - - 2,301
Repurchase of common stock (9,628) (3,300)
Borrowings on revolving loan 7,643,595 7,642,866 8,959,176
Repayments on revolving loan (7,588,434) (7,498,963) (10,177,775)
Payments of capital lease obligations (109,555) (27,846)
-----------------------------------------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (54,394) 106,429 (1,219,598)
-----------------------------------------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (545,948) 330,836 (2,292,101)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 621,414 290,578 2,582,679
-----------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 75,466 $ 621,414 $ 290,578
===============================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
21
NOTES TO FINANCIAL STATEMENTS
DOTRONIX, INC.
YEARS ENDED JUNE 30, 2000, 1999 AND 1998.
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.
Although the Company has developed standardized CRT displays in order to provide
cost-effective products, it is intent on providing turn-key solutions to
electronic display problems in a wide variety of industries. Two new computer
based systems using interactive touch panel display technology are being
marketed for use in point of purchase display systems in major retail stores,
and multilingual way finding display systems for use in airports and large
commercial buildings, including office buildings and hotels. To date efforts to
market these products have not produced material revenues.
MANAGEMENT PLANS:
The Company has experienced revenue declines in each of the last three years and
has incurred net loses of $1.32 million, $2.04 million and $1.03 million in
fiscal 2000, 1999 and 1998 respectively. In addition, the Company has used
approximately $398,000, $63,000, and $914,000 of cash in operations in 2000,
1999, and 1998 respectively. As a result, the Company has been unable to obtain
traditional financing arrangements and in September 1999 the Company's president
and a major stockholder entered into an agreement to provide up to $1,000,000 of
secured financing to the Company in the form of cash loans, or a guarantee of
Company borrowings.
In September 2000 the Company's president and major stockholder agreed to extend
the loan agreement to February 28, 2002, and to increase the loan limit to
$1,250,000 in secured financing.
During fiscal 2000 the Company reduced its staff by approximately 42%, and
continues to evaluate strategies for further decreasing its expense structure to
a level more nearly commensurate with its current revenue. In addition
management continues to evaluate various alternatives to expand its product
offerings to new and existing customers. There is no assurance that the Company
will be successful in executing these strategies.
21
<PAGE>
22
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.
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>
2000 1999
---- ----
<S> <C> <C>
Raw materials $ 1,255,966 $ 1,780,861
Work-in-process 515,948 424,463
Finished goods 277,049 188,281
-------------- ---------------
Total inventory $ 2,048,963 $ 2,393,605
============== ===============
</TABLE>
PROPERTY, PLANT AND EQUIPMENT:
Depreciation is provided using the straight-line method over estimated useful
lives of twenty five years for buildings, five years for laboratory equipment,
office furniture and fixtures and three years for transportation equipment. Data
processing hardware and software is being depreciated over two to five years.
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 $954,000 and $882,000 at
June 30, 2000 and 1999, 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 $35,000 and $25,000 at June 30, 2000 and 1999,
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 $247,000, $518,000, and $399,000 for the years ended
June 30, 2000, 1999, and 1998, respectively.
22
<PAGE>
23
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 2000, 1999 and 1998, all stock options have an
antidilutive effect and have been excluded from EPS calculations. The number of
shares of stock excluded from the EPS calculations for stock options was 124,992
shares, 167,112 shares, and 167,943 shares for the years ended June 30, 2000,
1999, and 1998, respectively. The number of shares of stock excluded from EPS
calculations under warrants granted in the year ended June 30, 2000 were 142,703
shares.
ACCOUNTING ESTIMATES:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
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
Effective July 1, 2000 the Company adopted Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS
No. 138 an amendment of SFAS No.133. These statements did not have a material
impact on the Company's results of operations, financial position or cash flows.
23
<PAGE>
24
B. PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment consists of the following:
<TABLE>
<CAPTION>
June 30
---------------------------------
2000 1999
---- ----
<S> <C> <C>
Land $ 175,000 $ 175,000
Building and building improvements 1,050,501 1,050,501
Machinery and laboratory equipment 3,399,599 3,380,489
Office furniture and fixtures 819,195 784,451
Data processing equipment 1,410,008 1,370,463
Transportation equipment 38,060 38,060
-------------- ---------------
6,892,363 6,798,964
Less: accumulated depreciation and
amortization 5,733,941 5,493,332
-------------- ---------------
$ 1,158,422 $ 1,305,632
============== ===============
</TABLE>
C. FINANCING ARRANGEMENTS AND CAPITAL OBLIGATIONS
FINANCING ARRANGEMENTS:
On February 23, 2000, the Company entered into a revolving credit facility with
its president and major stockholder, and in September 2000 the Company's
president and major stockholder agreed to extend the loan agreement to February
28, 2002, and to increase the loan limit to $1,250,000 in secured financing. The
revolving credit facility contains various restrictive covenants including a
minimum tangible net worth balance of $2.0 million. As of September 27, 2000 the
Company had $832,317 available under the agreed to extension of the revolving
credit facility.
Interest on outstanding borrowings under the revolving credit facility is
accrued at the U.S. Prime interest rate plus 3%. Additionally, the Company is
required to issue warrants on the Company's stock to the president and major
shareholder for incremental increases in the outstanding borrowings balance. One
warrant is issued for every $4 in incremental borrowings made by the Company.
All warrants issued expire in 4 years and have an exercise price equal to the
fair market value of the Company's stock at the date of grant. Once repayments
on the facility have been made, additional warrants are issued for incremental
borrowings on the facility only to the extent that the new outstanding
borrowings balance exceeds the previous high outstanding borrowings balance. The
Company recognizes interest expense for the cost of the warrants, which is
measured based on the fair value of the warrants at the date of grant,
consistent with the provisions of SFAS 123, "Accounting for Stock Based
Compensation." The fair value of all warrants granted were estimated on the date
of grant using the Black-Scholes pricing model based on the following
assumptions:
Dividend yield None
24
<PAGE>
25
<TABLE>
<S> <C>
Risk free interest rate 6.54%
Expected life 4 years
Expected volatility 109%
Fair value of warrants issued $60,000
</TABLE>
There were a total of 142,703 warrants issued in 2000 with a weighted average
exercise price of $0.56. The weighted average remaining life on the warrants was
3.69 years at June 30, 2000. The Company recorded interest expense for the year
ended June 30, 2000 of approximately $20,000 related to the warrants.
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 covered 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.
The outstanding balance on the Credit Agreement at June 30, 1999 was $398,167.
On February 23, 2000, the Company terminated the Credit Agreement with Coast and
replaced it with the $1.0 million revolving loan facility with its president and
major stockholder that expires on February 28, 2001.
25
<PAGE>
26
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 net book value of equipment under the capital lease
obligation was $106,660 and $170,657 at June 30, 2000 and 1999, respectively.
Payments due under capital leases at June 30, 2000 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal 2001 $ 34,571
Less: interest 1,315
-----------
$ 33,256
===========
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, 2000 (Note H) as follows:
Year ending June 30:
2001 $ 157,000
2002 147,000
2003 123,000
2004 78,000
2005 78,000
2006, thereafter 283,000
-----------
$ 866,000
===========
</TABLE>
Total operating lease and rent expense for the Company for the years ended June
30, 2000, 1999, and 1998 was $200,000, $158,000 and $156,000, respectively.
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 1998, 1999 and 2000 because of losses
incurred.
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
26
<PAGE>
27
the closing market price on the date of grant. No options were granted in
2000, 1999, or 1998; 32,492 options are outstanding at June 30, 2000.
The Company also has a Non-employee Director Stock Option Plan for the granting
of options to non-employee Directors to purchase up to 100,000 shares of the
Company's common stock. Each non-employee 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 six months
from grant date and expire in ten years. All options are granted at the closing
over market price on the date of grant. 10,000 options were granted each year in
2000, 1999, and 1998. 92,500 options are outstanding at June 30, 2000.
In addition, each non-employee director is automatically granted, on the first
business day following the Company's annual meeting, 500 shares of common stock.
Compensation expense of $1,000, $2,438 and $1,938 was recorded related to these
grants in 2000, 1999, and 1998, respectively.
A summary of the status of the Company's stock options is presented below:
<TABLE>
<CAPTION>
Years Ended June 30
----------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
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 167,112 $1.66 167,943 $1.66 172,010 $1.66
Granted 10,000 0.23 10,000 1.00 10,000 0.97
Exercised 0 0.00 0 0.00 (466) 0.78
Canceled (52,120) 1.96 (10,831) 1.69 (13,601) 1.06
----------- ----------- ------------
Outstanding at end of
year 124,992 1.41 167,112 1.66 167,943 1.70
=========== ========== =========== ========= ============ ==========
Options exercisable at
year end 124,992 1.41 167,112 1.66 141,723 1.57
=========== ========== =========== ========= ============ ==========
</TABLE>
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 2000, 1999, and 1998 net loss and loss per
share would have been changed to the pro forma amounts indicated below:
27
<PAGE>
28
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net loss:
As reported $ (1,318,199) $ (2,039,699) $ (1,026,479)
Pro forma (1,320,362) (2,047,331) (1,030,641)
Earnings per basic and diluted
share:
As reported $ (.32) $ (.50) $ (.25)
Pro forma (.32) (.50) (.26)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions and results.
2000 1999 1998
---- ---- ----
Dividend yield None None None
Risk free interest rate 6.75% 5% 5%
Expected life 10 years 10 years 10 years
Expected volatility 109% 65% 65%
Expected fair value of options on
grant date $ 2,163 $ 3,733 $ 4,162
</TABLE>
28
<PAGE>
29
The following table summarizes information about stock options outstanding at
June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------ -------------------
Number Remaining Exercise Number Exercise
Outstanding Contractual Life Price Exercisable Price
---------------- --------------------- ------------------ --------------------- -----------------
<S> <C> <C> <C> <C>
10,000 9.5 years $ 0.23 10,000 $ 0.23
9,368 3.0 years 0.78 9,368 0.78
10,000 7.4 years 0.97 10,000 0.97
10,000 8.4 years 1.00 10,000 1.00
4,268 1.0 years 1.19 4,268 1.19
7,500 3.4 years 1.25 7,500 1.25
1,000 5.2 years 1.25 1,000 1.25
12,500 4.4 years 1.31 12,500 1.31
7,500 2.5 years 1.56 7,500 1.56
15,000 1.5 years 1.63 15,000 1.63
10,000 6.4 years 1.64 10,000 1.64
10,000 5.4 years 2.13 10,000 2.13
17,856 5.0 years 2.31 17,856 2.31
---------------- --------------------- ------------------ --------------------- -----------------
124,992 5.0 years $ 1.41 124,992 $ 1.41
================ ===================== ================== ===================== =================
</TABLE>
In 2000 and 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, 2000 and
1999, the Company had accrued $47,459 (137,006 shares) and $4,936 (7,264
shares), respectively, for this commitment.
In 1999, the Company entered into employment agreements with three employees
whereby 26,000 shares of restricted stock were granted. One third of the stock
vests on each of the employees' first three anniversary dates. In 1999 10,000
shares vested and 7,000 shares vested in 2000. Of the remaining 9,000 shares,
7,000 shares and 2,000 shares are scheduled to vest in 2001 and 2002,
respectively. Compensation expense of $6,750 and $11,500 was recognized in 2000
and 1999, respectively. The Company has accrued unearned compensation of $9,125
at June 30, 2000 and $15,875 at June 30, 1999 related to these agreements.
29
<PAGE>
30
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
--------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Computed tax (benefit) provision at
Federal tax rate $ (451,000) $ (686,000) $ (359,000)
Change in valuation allowance 390,000 639,000 322,000
Permanent differences 31,000 32,000 29,000
Graduated tax benefit 13,000 20,000 10,000
Other 17,000 (5,000) (2,000)
--------------- ------------- --------------
Provision (benefit) $ 0 $ 0 $ 0
=============== ============= =============
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 carry-forwards and
valuation allowances comprising the net deferred taxes on the balance sheets are
as follows:
June 30, 2000
--------------------------------------------------
Assets Liabilities Total
------ ----------- -----
Net operating loss carryforward $ 1,616,000 $ 1,616,000
Inventory 523,000 523,000
Tax credit carryforward 93,000 93,000
Sales leaseback gain 143,000 143,000
Accrued liabilities 68,000 68,000
Other 36,000 36,000
Valuation allowance (2,479,000) (2,479,000)
--------------- ------------- -------------
$ 0 $ 0 $ 0
=============== ============= =============
30
<PAGE>
31
June 30, 1999
--------------------------------------------------
Assets Liabilities Total
------ ----------- -----
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
=============== ============= =============
At June 30, 2000, the Company has federal income tax net operating loss
carryforwards of approximately $4,850,000 which will expire in 2009 through 2020
and for Minnesota income tax net operating loss carryforwards of $1,380,000
which will expire in 2004 through 2015. Future utilization of loss carryforwards
could be limited under Internal Revenue Code Section 382 if there are
significant changes in ownership. 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:
2000 1999 1998
---- ---- ----
United States $ 6,900,490 $ 7,335,428 $ 8,516,942
Foreign 454,213 335,000 741,000
--------------- ------------- -------------
$ 7,354,703 $ 7,670,428 $ 9,257,942
=============== ============= =============
</TABLE>
The Company does not have assets outside of the United States.
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>
2000 1999 1998
----------------------------------------
<S> <C> <C> <C>
Customer A 17% 7% 9%
Customer B 5% 10% 0%
Customer C 4% 8% 12%
</TABLE>
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<PAGE>
32
At June 30, 2000, four different customers represented 36% of accounts
receivable. At June 30, 1999, Customer B represented 43% of the 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
which resulted in a net gain of $476,000. The gain was deferred and is being
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, 2000 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 from companies
that are owned by the president and major stockholder of the Company. During the
years ended June 30, 2000, 1999 and 1998, the Company incurred approximately
$143,000, $98,000 and $82,000 respectively for rental of these manufacturing and
warehousing facilities.
Operating commitments as of June 30, 2000 (Note D) include $810,000 of
obligations to the president and major stockholder of the Company.
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 2000, 1999 and 1998
royalty expense of $194, $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
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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 $33,000, $42,000
and $45,000 for the years ended June 30, 2000, 1999, and 1998, respectively.
J. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow activities are as follows:
<TABLE>
<CAPTION>
June 30
---------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 111,969 $ 72,000 $ 120,000
Income taxes 1,966 1,000 1,000
Noncash investment and financing activities:
Equipment acquired by capital lease 170,657
Stock issued to employees per
employment agreements 24,937
Stock issued to directors 1,000 2,438 1,938
</TABLE>
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<PAGE>
34
DOTRONIX, INC.
EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-KSB
FOR YEAR ENDED JUNE 30, 2000
Exhibit Description Page in
Number ----------- Form
------- -------
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).
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35
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.)
10.8 Loan and security agreements by and between the Company and
William S. Sadler, dated February 23, 2000 (incorporated by
reference to exhibit 10.1 on Form 10-QSB for the quarter ended
March 31, 2000.)
10.9 1999 Employee Stock Incentive Plan (incorporated by reference to
Appendix A to the Company's definitive proxy statement filed
October 28, 1999)
10.10 1999 Non-employee Director Stock Option and Stock Grant Plan
(incorporated by reference to Appendix B to the Company's
definitive proxy statement filed October 28, 1999)
23 Independent Auditors' Consent (filed herewith).
27 Financial Data Schedule (filed herewith).
35
