<PAGE>
CONFORMED COPY
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter Ended December 31, 1999 Commission 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 or organization) Identification No.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at February 3, 2000
- - ----------------------- -------------------------------
Common stock, par value 4,072,732
shares
$ .05 per share
<PAGE>
DOTRONIX, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE(S)
<S> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition and Results
of Operations 7-8
PART II - OTHER INFORMATION
Item 1. Exhibits and Reports on Form 8-K 9-10
EXHIBIT 27 - Financial Data Schedule 11
</TABLE>
<PAGE>
STATEMENTS OF CASH FLOWS
DOTRONIX INC
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31
-----------------------------------------
1999 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings $ (502,182) $ (802,073)
Adjustment to reconcile net loss to net cash
used in operating activities:
Writedown for inventory obsolescence 70,000 79,994
Depreciation and amortization 146,596 124,097
Stock compensation 29,485
Amortization of deferred gain on sale of (23,806)
building
Change in assets and liabilities:
Accounts receivable 200,209 (65,390)
Inventories 37,726 671,538
Prepaid expenses (54,035) (122,465)
Other assets 2,988 24,147
Accounts payable and accrued liabilities (100,989) (79,396)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (194,008) (169,548)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (50,452) (32,034)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (50,452) (32,034)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving loan 4,589,436 3,921,003
Repayments on revolving loan (4,585,681) (3,650,624)
Payments of capital lease obligations (76,762)
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (73,007) 270,379
----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (317,467) 68,797
CASH AND CASH EQUIVALENTS AT
BEGINNING OF THE PERIOD 621,414 290,578
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CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 303,947 $ 359,375
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
DOTRONIX INC
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED, SIX MONTHS ENDED,
DECEMBER 31 DECEMBER 31
1999 1998 1999 1998
---- ---- ---- ----
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUES $ 1,782,896 $ 1,940,993 $ 4,351,844 $ 3,682,725
OPERATING EXPENSES:
Cost of Sales 1,371,496 1,347,433 3,156,303 2,551,618
Selling, general
and administrative 892,608 946,008 1,631,369 1,898,892
Interest 37,895 20,115 66,354 34,288
----------- ----------- ----------- -----------
Net (loss) $ (519,103) $ (372,563) $ (502,182) $ (802,073)
=========== =========== =========== ===========
Basic and diluted loss
per common share
(Note B) $ (0.13) $ (0.09) $ (0.12) $ (0.20)
Average number of common
shares outstanding 4,072,978 4,040,666 4,065,290 4,040,134
</TABLE>
See notes to financial statements.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS, DOTRONIX, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
ASSETS 1999 1999
-------------------- -------------------
<S> <C> <C>
Cash and cash equivalents $ 303,947 $ 621,414
Accounts receivable, less allowance
for doubtful accounts of $36,588 at both dates 1,151,856 1,352,065
Inventories:
Raw materials 1,523,991 1,780,861
Work-in-process 532,062 424,463
Finished goods 229,826 188,281
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Total inventories 2,285,879 2,393,605
Prepaid expenses 73,007 18,972
------------ ------------
Total current assets 3,814,689 4,386,056
PROPERTY, PLANT & EQUIPMENT
at cost net of accumulated depreciation
of $5,598,929 and $5,493,332 respectively 1,250,487 1,305,632
OTHER ASSETS:
Excess of cost over fair value of net assets acquired,
less amortization of $917,971 and $881,972, respectively 521,983 557,982
License agreement, net 20,000 25,000
Other 6,704 9,692
------------ ------------
TOTAL ASSETS $ 5,613,863 $ 6,284,362
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving loans $ 401,922 $ 398,167
Current maturities-capital lease obligations 66,049 110,596
Accounts payable 606,984 664,106
Salaries, wages and payroll taxes 90,741 157,782
Current portion-deferred gain on sale of building 47,613 47,613
Other accrued liabilities 177,471 139,893
------------ ------------
Total current liabilities 1,390,780 1,518,157
CAPITAL LEASE OBLIGATIONS - 32,215
DEFERRED GAIN ON SALE OF BUILDING 396,775 420,581
STOCKHOLDERS' EQUITY:
Common stock, $.05 par value 203,031 202,880
Additional paid-in capital 10,823,483 10,812,928
Unearned compensation (11,500) (15,875)
Accumulated deficit (7,188,706) (6,686,524)
------------
Total stockholders' equity 3,826,308 4,313,409
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,613,863 $ 6,284,362
============ ============
</TABLE>
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
A. Basis of Presentation
The balance sheet as of December 31, 1999, the statements of operations for the
three and six month periods ended December 31, 1999 and 1998 and the statements
of cash flows for the six month periods ended December 31, 1999 and 1998 have
been prepared by the Company without audit. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position, results of operations and cash flows at December
31, 1999 and for the three and six months periods ended December 31, 1999 and
1998 presented herein have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Company's financial statements and notes thereto
included in the Annual Report on Form 10-KSB of the Company for the fiscal year
ended June 30, 1999.
B. Earnings per share
The following table reflects the calculation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
------------ ------------ ---------- ----------
December 31 (1) December 31 (1) December 31 (1) December 31 (1)
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Loss per share - basic and diluted
Net loss ($519,103) ($372,563) ($502,182) ($802,073)
Weighted average shares outstanding 4,072,978 4,040,666 4,065,290 4,040,134
Net loss per share - basic ($0.13) ($0.09) ($0.12) ($0.20)
========================================================================
</TABLE>
(1) The effect of stock options have been excluded from calculation of earnings
per share for the three months and six months ended December 31, 1999 and
December 31, 1998 as their effect is antidilutive.
C. Liquidity
The Company has not met the tangible net worth covenant in its revolving credit
agreement since December 1998. On October 1, 1999 the lender under this
agreement notified the Company of its intent to terminate the agreement and to
require repayment of the borrowings thereunder plus an early termination fee of
$30,000 effective December 31, 1999. In a letter dated January 21, 2000, the
lender agreed to advance funds to the Company through February 29, 2000. The
lender will continue to receive all payments made on Company receivables until
all amounts due the lender are paid. The Company expects payments will be
completed by March 31, 2000. At January 21, 2000, borrowing under this agreement
totaled $481,143. Substantially all of the Company's assets, other than its real
<PAGE>
property, are pledged to secure the borrowings under this agreement. When
payment is completed all pledged assets will be released.
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. The terms of the lending agreement will be
consistent with the Company's existing agreement. The proposed interest rate of
3% over the published prime rate of Norwest Bank is lower than the current rate
and lower than competitive rates from an outside lending institution. Loan
origination fees, due diligence costs other than legal fees, and loan
termination fees will be waived.
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.
ITEM2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue decreased by $158,000 or 8% for the three months ended December 31,
1999, and increased $669,000, or 18% for the six months ending December 31,
1999, compared to like periods in the prior year. The six month increase in 1999
over 1998 was attributable to demand for the new intelligent monitor products.
The gross margin percentage for the quarter ended December 31, 1999 was 23%,
compared to 31% for the same quarter ended in fiscal 1998. The gross margin
percentage for the six months ended December 31, 1999 was 27%, compared to 31%
for the six months ended December 31, 1998. One time costs associated with the
consolidation of manufacturing at the Eau Claire facility contributed to the
decrease in gross margin percentage. These costs included training costs related
to products formerly manufactured in New Brighton, and cost of moving equipment
and inventory.
Selling, general, and administrative expenses decreased $53,000 or 6% for the
quarter and $268,000 or 14% for the six months ended December 31, 1999, when
compared to the prior year. The decrease was due to reductions in personnel and
the completion of a major product development effort in fiscal 1999. . Interest
expense increased $18,000, or 88% during the quarter and $32,000, or 94% for the
six months ended December 31, 1999 compared to the same period of the prior
year. Increased average borrowings and a higher average interest rate caused the
increase in interest expense.
Starting in October 1999 a cost reduction program was implemented which reduced
payroll and related costs by 10% at December 31, 1999 and an additional 10%
reduction at January 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has not met the tangible net worth covenant in its revolving credit
agreement since December 1998. On October 1, 1999 the lender under this
agreement notified the Company of its intent to terminate the agreement and to
require repayment of the borrowings thereunder plus an early termination fee of
$30,000 effective December 31, 1999. In a letter dated January 21, 2000, the
lender
<PAGE>
agreed to advance funds to the Company through February 29, 2000. The lender
will continue to receive all payments made on Company receivables until all
amounts due the lender are paid. The Company expects payments will be completed
by March 31, 2000. At January 21, 2000, borrowing under this agreement totaled
$481,143. Substantially all of the Company's assets, other than its real
property, are pledged to secure the borrowings under this agreement. When
payment is completed all pledged assets will be released.
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. The terms of the lending agreement will be
consistent with the Company's existing agreement. The proposed interest rate of
3% over the published prime rate of Norwest Bank is lower than the current rate
and lower than competitive rates from an outside lending institution. Loan
origination fees, due diligence costs other than legal fees, and loan
termination fees will be waived.
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.
During the six months ended December 31, 1999, operations consumed $194,000 of
cash. Purchases of property, plant and equipment consumed $50,000 of cash.
Payment of capital lease obligations consumed $77,000 of cash. Increased
borrowings on the working capital loan provided $4,000 of cash to the Company.
The overall result was an decrease in cash of $317,000.
COMMON STOCK LISTING
The Company's Common Stock previously was quoted on the NASDAQ Stock Market
under the symbol "DOTX". Effective August 4, 1999 the Company's Common Stock
transferred to the OTC Bulletin Board.
IMPACT OF THE YEAR 2000 ON THE COMPANY'S INFORMATION TECHNOLOGY SYSTEMS.
The Company's products are not impacted by the year 2000 issue since the
displays/monitors that the Company designs and manufacturers do not contain date
logic as part of their operation.
To comply with the year 2000 issue, the Company purchased year 2000 ready
hardware and software (per vendor readiness documents) in September 1998. Total
estimated cost of the purchase was $433,000 of which $398,000 has been
capitalized.
No additional costs are expected to be incurred after December 31, 1999.
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
<PAGE>
vendor and the software vendor are both well established companies with a long
history of successful client installations. The Company believes that the
hardware and software vendors will support their products under all
contingencies.
In August 1999 the Company began a written evaluation of its suppliers. Letters
requesting information of Year 2000 readiness were sent or faxed to all key
suppliers. A substantial majority of suppliers responded that they were Year
2000 ready and products and services would not be delayed due to Year 2000
problems. No suppliers responded that they were not Year 2000 ready. The Company
has continued to contact the non-responding suppliers to determine their Year
2000 readiness. For a majority of the Company's critical materials, alternative
suppliers are available if current suppliers experience Year 2000 difficulties.
The Company has a long history of re-engineering products on short notice
because of the unexpected unavailability of parts.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities". This Statement requires companies to record derivatives
on the balance sheet as assets and liabilities, measured at fair value. Gains or
losses resulting from changes in the value of those derivatives would be
accounted for depending on the use of the derivatives and whether it qualifies
for hedge accounting. Management has not yet completed an assessment of the
impact of adopting the provisions of SFAS 133 on the Company's financial
statements. This statement is effective for fiscal years beginning after June
15, 2000. The Company will adopt this accounting standard as required in fiscal
2001.
PART II - OTHER INFORMATION
Item 4. Submission Of Matters to a Vote of Securities Holders
At the annual meeting of the shareholders of the Company Held on December 28,
1999 the following items were voted on:
<TABLE>
<CAPTION>
ELECTION OF DIRECTORS
VOTES FOR WITHHELD
--------- ------
<S> <C> <C>
William S. Sadler 3,642,328 92,637
Ray L. Bergeson 3,642,328 92,637
Robert J. Snow 3,642,328 92,637
Edward L. Zeman 3,642,328 92,637
L. Daniel Kuechenmeister
COMPANY PROPOSALS VOTES FOR WITHHELD ABSTAIN
--------- -------- -------
<C> <C> <C> <C>
1999 Stock Incentive Plan 1,992,797 146,770 44,059
1999 Non-employee Director Stock Option
and Stock Grant Plan 1,924,576 199,672 49,470
</TABLE>
Both proposals passed.
<PAGE>
Item 6. Exhibits and reports on Form 8-K
(a) Exhibit 27........Financial Data Schedule
(b) No reports on Form 8-K were issued during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 14, 2000 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)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-2000
<PERIOD-START> OCT-01-1999 JUL-01-1999
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 303,947 0
<SECURITIES> 0 0
<RECEIVABLES> 1,188,444 0
<ALLOWANCES> (36,588) 0
<INVENTORY> 2,285,879 0
<CURRENT-ASSETS> 3,814,689 0
<PP&E> 6,849,416 0
<DEPRECIATION> (5,598,929) 0
<TOTAL-ASSETS> 5,631,863 0
<CURRENT-LIABILITIES> 1,390,465 0
<BONDS> 0 0
0 0
0 0
<COMMON> 202,880 0
<OTHER-SE> 3,623,742 0
<TOTAL-LIABILITY-AND-EQUITY> 5,631,863 0
<SALES> 1,759,561 4,310,092
<TOTAL-REVENUES> 1,782,896 4,351,844
<CGS> 1,371,496 3,156,303
<TOTAL-COSTS> 892,608 1,631,369
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 37,895 66,354
<INCOME-PRETAX> (519,103) (502,182)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (519,103) (502,182)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (519,103) (502,182)
<EPS-BASIC> (0.13) (0.12)
<EPS-DILUTED> (0.13) (0.12)
</TABLE>
