**CONFORMEDCOPY**

** **

**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** |
|-----------------------------------------------------------------------------------------|

** **

**Forthe Quarter Ended March 31, 2003          CommissionFile No. 0-9996**

** **

**DOTRONIX, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Minnesota**                                                    |   | **41-1387074**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bysection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.

 

| YES  ý |   | NO  o |
|-----------------------|--------|-----------------|

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock as of thelatest practicable date.

 

| **Class**                                |   | **Outstanding at May   14, 2003** |
|------------------------------------------|--------|----------------------------------------|
| Common stock,  par value  $.05 per share |   | 4,180,341 shares                       |

 

 

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DOTRONIX, INC.

INDEX

 
| Part I - Financial Information |
|--------------------------------|
|                           |
|                           | Item 1. | Financial Statements (Unaudited) |
|                           |   |
|                           |   | Balance Sheets |
|                           |   |
|                           |   | Statements  of Operations |
|                           |   |
|                           |   | Statements  of Cash Flows |
|                           |   |
|                           |   | Notes to Financial Statements |
|                           |   |
|                           | Item 2. | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |
|                           |   |
|                           | Item 3. | Controls and Procedures |
|                           |   |
| Part II - Other Information    |
|                           |   |
|                           | Item 6. | Exhibits and Reports on Form 8-K |

 

2

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PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

**BALANCESHEETS**

**DOTRONIX, INC.**

**(UNAUDITED)**

 
|                                                                                                               |   | **MARCH 31  2003** |       | **June 30  2002** |       |
|--------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------|------------|
| ASSETS                                                                                                             |   |               | ** ** |              | ** ** |
| CURRENT ASSETS:                                                                                                    |   |               |       |              |       |
| Cash and cash equivalents                                                                                          |   | $                  | 87,449     |              | $          | 150,328 |   |
| Accounts receivable, less allowance for doubtful  accounts of $18,030                                              |   | 110,821            |       | 369,162           |       |
|                                                                                                               |   |               |       |              |       |
| Inventories:                                                                                                       |   |               |       |              |       |
| Raw materials                                                                                                      |   | 428,703            |       | 728,913           |       |
| Work-in-process                                                                                                    |   | 24,504             |       | 159,172           |       |
| Finished goods                                                                                                     |   | 143,418            |       | 160,332           |       |
| Total inventories                                                                                                  |   | 596,625            |       | 1,048,417         |       |
| Prepaid expenses                                                                                                   |   | 33,303             |       | 6,631             |       |
| Total current assets                                                                                               |   | 828,198            |       | 1,574,538         |       |
|                                                                                                               |   |               |       |              |       |
| ASSETS HELD FOR SALE                                                                                               |   | 360,241            |       | —            |       |
|                                                                                                               |   |               |       |              |       |
| PROPERTY, PLANT & EQUIPMENT at cost net of  accumulated depreciation of $4,955,564 and $5,522,612 respectively |   | 298,526            |       | 757,793           |       |
| TOTAL ASSETS                                                                                                       |   | $                  | 1,486,965  |              | $          | 2,332,331 |   |
|                                                                                                               |   |               |       |              |       |
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY                                                                |   |               |       |              |       |
| CURRENT LIABILITIES:                                                                                               |   |               |       |              |       |
| Revolving loans payable to a related party                                                                         |   | $                  | 1,206,440  |              | 767,720    |   |
| Accounts payable                                                                                                   |   | 176,213            |       | 104,209           |       |
| Salaries, wages and payroll taxes                                                                                  |   | 45,745             |       | 78,233            |       |
| Current portion-deferred gain on sale of building                                                                  |   | 47,613             |       | 47,613            |       |
| Other accrued liabilities                                                                                          |   | 39,902             |       | 45,912            |       |
| Total current liabilities                                                                                          |   | 1,515,913          |       | 1,043,687         |       |
|                                                                                                               |   |               |       |              |       |
| DEFERRED GAIN ON SALE OF BUILDING                                                                                  |   | 247,417            |       | 277,742           |       |
|                                                                                                               |   |               |       |              |       |
| STOCKHOLDERS’ (DEFICIT) EQUITY:                                                                               |   |               |       |              |       |
| Common stock, $.05 par value                                                                                       |   | 209,017            |       | 208,642           |       |
| Additional paid-in capital                                                                                         |   | 10,931,831         |       | 10,922,201        |       |
| Accumulated deficit                                                                                                |   | (11,417,213        | )          | (10,119,941       | )          |
| Total stockholders’ (deficit) equity                                                                          |   | (276,365           | )          | 1,010,902         |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT)  EQUITY                                                         |   | $                  | 1,486,965  |              | $          | 2,332,331 |   |

 

Seenotes to financial statements.

 

3

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**STATEMENTSOF OPERATIONS**

**DOTRONIX, INC.**

**(UNAUDITED)**

 
|                                        |   | **Three months ended,  MARCH 31** |     | **Nine months ended,  MARCH 31** |   |
|---------------------------------------------|--------|-----------------------------------|----------|----------------------------------|--------|
|                                        |   | **2003**                          |     | **2002**                         |   | **2003** |   | **2002** |   |
|                                        |   |                              |     |                             |   |   |   |   |   |
| REVENUES                                    |   | $                                 | 384,852  |                             | $      | 1,259,669 |   | $ | 1,313,649 |   | $ | 2,909,251 |   |
|                                        |   |                              |     |                             |   |   |   |   |   |
| OPERATING EXPENSES:                         |   |                              |     |                             |   |   |   |   |   |
| Cost of Sales                               |   | 448,503                           |     | 951,307                          |   | 1,296,998 |   | 2,166,895 |   |
|                                        |   |                              |     |                             |   |   |   |   |   |
| Selling, general and administrative         |   | 432,446                           |     | 474,255                          |   | 1,251,750 |   | 1,423,033 |   |
|                                        |   |                              |     |                             |   |   |   |   |   |
| Interest                                    |   | 29,248                            |     | 10,574                           |   | 62,173 |   | 34,727 |   |
|                                        |   |                              |     |                             |   |   |   |   |   |
| Net loss                                    |   | $                                 | (525,345 | )                                | $      | (176,467 | ) | $ | (1,297,272 | ) | $ | (715,404 | ) |
|                                        |   |                              |     |                             |   |   |   |   |   |
|                                        |   |                              |     |                             |   |   |   |   |   |
| Basic and diluted net loss per common share |   | $                                 | (0.13    | )                                | $      | (0.04 | ) | $ | (0.31 | ) | $ | (0.17 | ) |
|                                        |   |                              |     |                             |   |   |   |   |   |
| Average number of common shares outstanding |   | 4,178,874                         |     | 4,171,341                        |   | 4,174,823 |   | 4,171,341 |   |

 

Seenotes to financial statements.

 

4

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**STATEMENTSOF CASH FLOWS**

**DOTRONIX, INC**

**(UNAUDITED)**

 
|                                                                        |   | **Nine months ended  March 31** |       |
|-----------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                        |   | **2003**                        |       | **2002** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                       |   |                            |       |   |   |
| Net loss                                                                    |   | $                               | (1,297,272 | ) | $ | (715,404 | ) |
| Adjustment to reconcile net loss to net cash used  in operating activities: |   |                            |       |   |   |
|                                                                        |   |                            |       |   |   |
| Depreciation and amortization                                               |   | 81,895                          |       | 176,093 |   |
| Inventory write-down                                                        |   | 215,000                         |       | 180,000 |   |
| Stock compensation                                                          |   | 10,005                          |       | 2,375 |   |
| Change in assets and liabilities:                                           |   |                            |       |   |   |
| Accounts receivable                                                         |   | 258,341                         |       | 100,071 |   |
| Inventories                                                                 |   | 236,792                         |       | 136,466 |   |
| Prepaid expenses                                                            |   | (26,672                         | )          | (32,238 | ) |
| Accounts payable                                                            |   | 72,004                          |       | 79,804 |   |
| Salaries, wages and payroll taxes payable                                   |   | (32,488                         | )          | (42,807 | ) |
| Accrued liabilities                                                         |   | (6,010                          | )          | (869 | ) |
|                                                                        |   |                            |       |   |   |
| NET CASH USED IN OPERATING ACTIVITIES                                       |   | (488,405                        | )          | (116,509 | ) |
|                                                                        |   |                            |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                       |   |                            |       |   |   |
| Purchase of property, plant and equipment                                   |   | (13,194                         | )          | (35,182 | ) |
| .                                                                           |   |                            |       |   |   |
| NET CASH USED IN INVESTING ACTIVITIES                                       |   | (13,194                         | )          | (35,182 | ) |
|                                                                        |   |                            |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                       |   |                            |       |   |   |
| Borrowings on revolving loan                                                |   | 2,112,377                       |       | 3,264,000 |   |
| Repayments on revolving loan                                                |   | (1,673,657                      | )          | (3,141,463 | ) |
|                                                                        |   |                            |       |   |   |
| NET CASH PROVIDED BY FINANCING ACTIVITIES                                   |   | 438,720                         |       | 122,537 |   |
|                                                                        |   |                            |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                   |   | (62,879                         | )          | (29,154 | ) |
|                                                                        |   |                            |       |   |   |
| CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE  PERIOD                   |   | 150,328                         |       | 68,956 |   |
|                                                                        |   |                            |       |   |   |
| CASH AND CASH EQUIVALENTS AT THE END OF THE  PERIOD                         |   | $                               | 87,449     |   | $ | 39,802 |   |

 

Seenotes to financial statements.

 

5

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DOTRONIX, INC.

NOTES TO FINANCIALSTATEMENTS

 

A.                                   Basisof Presentation

 

The balance sheet as ofMarch 31, 2003, the statements of operations for the three and nine monthperiods ended March 31, 2003 and 2002 and the statements of cash flows for thenine month periods ended March 31, 2003 and 2002 have been prepared by theCompany without audit.  In the opinionof management, all adjustments (consisting only of normal recurring accruals)necessary to present fairly the financial position, results of operations andcash flows at March 31, 2003 and for three and nine month periods ended March31, 2003 and 2002 presented herein have been made.

 

Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted.  It is suggested that these financialstatements be read in conjunction with the Company’s financial statements andnotes thereto included in the Annual Report on Form 10-KSB of the Company forthe fiscal year ended June 30, 2002.

 

B.                                     Stockoptions

 

The Company has electedto 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 withemployees.  No compensation cost hasbeen recognized for options issued under the plans when the exercise price ofthe options is at least equal to the fair market value of the common stock atthe date of grant.  Had compensationcost for the stock options issued been determined based on the fair value atthe grant date, consistent with the provisions of SFAS No. 123,*“Accountingfor Stock Based Compensation,*” the Company’s 2003 and 2002 net lossand loss per share would have been changed to the pro forma amounts indicatedbelow:

 
|                             |   | **Three months ended,  MARCH 31** |     | **Nine months ended,  MARCH 31** |   |
|----------------------------------|--------|-----------------------------------|----------|----------------------------------|--------|
|                             |   | **2003**                          |     | **2002**                         |   | **2003** |   | **2002** |   |
|                             |   |                              |     |                             |   |   |   |   |   |
| Net loss:                        |   |                              |     |                             |   |   |   |   |   |
| As reported                      |   | $                                 | (525,345 | )                                | $      | (176,467 | ) | $ | (1,297,272 | ) | $ | (715,404 | ) |
| Pro forma                        |   | (525,608                          | )        | (178,567                         | )      | $ | (1,297,535 | ) | (717,504 | ) |
| Loss per basic and diluted share |   |                              |     |                             |   |   |   |   |   |
| As reported                      |   | ($0.13                            | )        | ($0.04                           | )      | ($0.31 | ) | ($0.17 | ) |
| Pro forma                        |   | ($0.13                            | )        | ($0.04                           | )      | ($0.31 | ) | ($0.17 | ) |
|                                  |        |                                   |          |                                  |        |  |  |  |  |  |  |  |  |

 

C.                                     OperatingLosses, Management Plans, and Going Concern Considerations

 

The Company experiencedsubstantial revenue declines and incurred substantial net losses during fiscal2002, 2001, and 2000. This trend has continued in the first nine months offiscal 2003. Accordingly, during those years it engaged in significant costcutting measures, including staff reductions.

 

The Company has alsoundertaken a major change in strategy which includes two major goals. One goalis to purchase its products rather than manufacture them. The costs ofmaintaining manufacturing capacity in a highly volatile and uncertain marketmakes in house manufacturing impractical and unprofitable.  The other goalis to become more valuable to the end user of display devices by incorporatingall elements of a display system, including 

 

6

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hardware, software,content, installation, and maintenance, into the Company’s product offerings.There is no assurance that the Company will be successful in executing thesestrategies, or that they will increase the Company’s revenues or improve itsresults of operations.

 

In conjunction with thischange in strategy, the Company discontinued its manufacturing operations atits Eau Claire, Wisconsin facility in January 2003. Certain final assemblyoperations were set up at its New Brighton, Minnesota facility. The Eau Clairebuilding has been listed for sale or lease with a real estate agent. Thebuilding has been reclassified on the balance sheet from “PROPERTY, PLANT &EQUIPMENT”  to “ASSETS HELD FOR SALE”.Depreciation was discontinued as of January 1, 2003. The carrying amount of thebuilding at March 31, 2003 was $360,241, consisting of a cost of  $959,301 less accumulated depreciation of$599,060.

 

Currently, the Companydoes not generate enough revenue to support its cost structure, and the Companywill continue to need external borrowings to support operations until theoperations improve. The Company has been unable to obtain traditional financingarrangements, and instead has entered into the financing arrangements with itspresident, who is also a major stockholder, which are described in Note Dbelow.  The Company will continue to bedependent on these arrangements to remain in business unless and until itsresults of operations improve.  TheCompany’s president is not obligated to continue these arrangements beyondtheir current expiration date of September 30, 2003.

 

Moreover, althoughCompany management believes that the cash and cash equivalents on hand at May14, 2003 and future amounts available under the aforementioned credit facilitywill be adequate to meet the Company’s cash requirements for the balance of thefiscal year ending June 30, 2003, given the substantial decline in revenue forthe quarter ($874,817) and nine months ($1,595,602) ended March 31, 2003compared to the prior year quarter and nine months, if revenues remain atcurrent levels or continue to decline, operations are likely to besubstantially reduced. In addition, unless revenue increases significantly oroperations are substantially reduced, these sources of cash will not beadequate to meet the Company’s cash requirements during the fiscal year endingJune 30, 2004, even if the Company’s president continues the present financingarrangements beyond their current expiration date of September 30, 2003.

 

D.                                    RevolvingLine of  Credit

 

On February 23, 2000, theCompany entered into a revolving credit facility with its president, who isalso a major stockholder, and in September 2000 the Company’s president andmajor stockholder extended the loan agreement to February 28, 2002, andincreased the loan limit to $1,250,000 in secured financing. In September 2001,the Company’s president and major stockholder extended the loan agreement toFebruary 28, 2003 and increased the loan limit to $1,500,000 in securedfinancing. In September 2002 the Company’s president extended the loanagreement to September 30, 2003. The revolving credit facility contained aminimum tangible net worth covenant, which the president and majorstockholder  reduced to $1.0 million inthe first quarter of fiscal 2002. In September of 2002 the president eliminatedthe tangible net worth covenant. As of May 14, 2003 the Company had $185,625 available under the extension of therevolving credit facility.

 

7

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Interest on outstandingborrowings under the revolving credit facility is accrued at the Wells FargoBank prime interest rate plus 3%. Additionally, the Company is required toissue warrants on the Company’s stock to the president and major shareholderfor incremental increases in the outstanding borrowings balance.  One warrant is issued for every $4 inincremental borrowings made by the Company. All warrants issued expire in 4 years and have an exercise price equalto the fair market value of the Company’s stock at the date of grant. Oncerepayments on the facility have been made, additional warrants are issued forincremental borrowings on the facility only to the extent that the newoutstanding borrowings balance exceeds the previous high outstanding borrowingsbalance. Approximately 31,700 additional warrants were earned in the quarterended December 31, 2002, and 46,600 additional warrants were earned in themonth of January 2003.  Those warrantswere issued in the quarter ending March 31, 2003. Interest costs related to theissuance of the warrants was approximately $9,000, which was expensed in thequarter ended March 31, 2003. Approximately 31,500 additional warrants, whichhave not yet been issued,  were earnedin the quarter ended March, 31, 2003. Interest costs related to issuance ofthese warrants were approximately $3,600.

 

Company managementbelieves that the cash and cash equivalents on hand at May 14, 2003 and futureamounts available under the aforementioned credit facility will be adequate tomeet the Company’s cash requirements for the balance of the fiscal year endingJune 30, 2003, based on current revenue levels. However, given the substantialdecline in revenue for the quarter ($874,817) and nine months ($1,595,602)  ended March 31, 2003 compared to the prioryear quarter and nine months, if revenues continue to decline, or remain atcurrent levels, operations are likely to be substantially reduced. In addition,unless revenue increases significantly or operations are substantially reduced,these sources of cash will not be adequate to meet the Company’s cashrequirements during the fiscal year ending June 30, 2004, even if the Company’spresident continues the present financing arrangements beyond their currentexpiration date of September 30, 2003. There is no certainty that the existingcredit facility will be extended beyond this expiration date, and, unlessresults of operations improve, little likelihood that the Company would be ableto replace it.

 

ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

 

Management Plans

 

The Company experiencedsubstantial revenue declines and incurred substantial net losses during fiscal2002, 2001, and 2000. This trend has continued in the first nine months offiscal 2003. Accordingly, during those years it engaged in significant costcutting measures, including staff reductions.

 

8

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The Company has alsoundertaken a major change in strategy which includes two major goals. One goalis to purchase its products rather than manufacture them. The costs ofmaintaining manufacturing capacity in a highly volatile and uncertain marketmakes in house manufacturing impractical and unprofitable.  The other goalis to become more valuable to the end user of display devices by incorporatingall elements of a display system, including hardware, software, content,installation, and maintenance,  into theCompany’s product offerings. There is no assurance that the Company will besuccessful in executing these strategies, or that they will increase theCompany’s revenues or improve its results of operations.

 

In conjunction with thischange in strategy, the Company discontinued its manufacturing operations atits Eau Claire, Wisconsin facility in January 2003. Certain final assemblyoperations were set up at its New Brighton, Minnesota facility. The Eau Clairebuilding has been listed for sale or lease with a real estate agent.

 

Currently, the Companydoes not generate enough revenue to support its cost structure, and the Companywill continue to need external borrowings to support operations until theoperations improve. The Company has been unable to obtain traditional financingarrangements, and instead has entered into the financing arrangements with itspresident, who is also a major stockholder, which are described under“Liquidity and Capital Resources” below. The Company will continue to be dependent on these arrangements toremain in business unless and until its results of operations improve.  The Company’s president is not obligated tocontinue these arrangements beyond their current expiration date of September30, 2003.

 

Moreover, althoughCompany management believes that the cash and cash equivalents on hand at May14, 2003 and future amounts available under the aforementioned credit facilitywill be adequate to meet the Company’s cash requirements for the balance of thefiscal year ending June 30, 2003, given the substantial decline in revenue forthe quarter ($874,817) and nine months ($1,595,602) ended March 31, 2003compared to the prior year quarter and nine months, if revenues remain atcurrent levels or continue to decline, operations are likely to besubstantially reduced. In addition, unless revenue increases significantly oroperations are substantially reduced, these sources of cash will not beadequate to meet the Company’s cash requirements during the fiscal year endingJune 30, 2004, even if the Company’s president continues the present financingarrangements beyond their current expiration date of September 30, 2003.

 

RESULTS OF OPERATIONS

 

Revenue decreased by$875,000, or 69%, for the three months ended March 31, 2003, and decreased$1,596,000, or 55%,  for the nine monthsending March 31, 2002, compared to like periods in the prior year. Orders fromtravel related industries, particularly airlines and airports, have notrebounded from the continuing travel recession, which has been ongoing sinceearly 2001. Other traditional original equipment manufacturing customers havealso curtailed their buying activity. Customers are continuing their evaluationof new products designed for quick serve restaurant chains, and other point ofpurchase applications. A small number of customers have placed orders for twostore and three store test installations, but have not yet undertaken largescale multiple store installations.

 

9

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The gross marginpercentage for the quarter ended March 31, 2003, was a negative (-) 17%,compared to positive (+) 24% for  thequarter ended  March  31, 2002. The gross margin percentage forthe nine months ended March 31, 2003, was 1%, compared to 26%, for the ninemonths ended March 31, 2002. Subsequent to March 31, 2002, there was a rapiddecline in orders, with an accompanying increase in unit manufacturing costsand declining gross margin percentages due to decreased unit productivity.Manufacturing capacity reduction was completed in January, 2003, but had only asmall effect on the quarterly and nine month fiscal 2003 gross margin percentagesbecause of various costs of closing the Eau Claire, Wisconsin, plant.  In addition, inventory was written down$105,000 in the quarter and $215,000 in the nine months ended March 31, 2003,to reflect estimated decreases in value due to decreased demand for variousproduct lines. Inventory was written down $60,000 for the three month period,and $180,000 in the nine month period ended March 31, 2002, which had a muchsmaller adverse effect on the gross margin percentages of fiscal 2002, than infiscal 2003, because of the relatively larger gross margins in fiscal 2002 thanin fiscal 2003.

 

Selling, general, andadministrative expenses decreased $42,000, or 9%, for the quarter ended March31, 2002, and $169,000, or 12%, for the nine months ended March 31, 2002, whencompared to the same periods in the prior year. The decrease was due tocontinuing cost reduction efforts and decreases in depreciation of fixed assetsand amortization of goodwill totaling approximately $36,000 for the quarter and$110,000 for the nine month period.

 

Interest expenseincreased $18,700, or 177%, for the three months ended March 31, 2003, and$27,500, or 79%, for the nine months ended March 31, 2003, compared to the sameperiods of the prior year. Although the loan interest rate declined by one halfof a percent in November 2002, additional borrowings due to continuing losseswas the primary cause of  the increasein interest expense. In addition, $9,000 in interest costs related to the issuanceof warrants were incurred in the three months and nine months ended March 31,2003, and no warrant costs were incurred in the three and nine months endedMarch 31, 2002.

 

As of March 31, 2003, theCompany had available income tax operating loss carry-forwards****thatcan be used to offset future taxable income. The Company has recorded avaluation allowance against all benefits associated with net operating losscarry-forwards as it is less likely than not that they will ultimately berealized.

 

LIQUIDITY AND CAPITALRESOURCES

 

On February 23, 2000, theCompany entered into a revolving credit facility with its president, who isalso a major stockholder, and in September 2000 the Company’s president andmajor stockholder extended the loan agreement to February 28, 2002, andincreased the loan limit to $1,250,000 in secured financing. In September 2001,the Company’s president and major stockholder extended the loan agreement toFebruary 28, 2003 and increased the loan limit to $1,500,000 in securedfinancing. In September 2002 the Company’s president extended the loanagreement to September 30, 2003. The revolving credit facility contained aminimum tangible net worth covenant, which the president and majorstockholder  reduced to $1.0 million inthe first quarter of fiscal 2002. In September of 2002 the president eliminatedthe tangible net worth covenant. As of May 14, 2003 the Company had $185,625 available under the extension of therevolving credit facility.

 

10

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Interest on outstandingborrowings under the revolving credit facility is accrued at the Wells FargoBank prime interest rate plus 3%. Additionally, the Company is required toissue warrants on the Company’s stock to the president and major shareholderfor incremental increases in the outstanding borrowings balance.  One warrant is issued for every $4 inincremental borrowings made by the Company. All warrants issued expire in 4 years and have an exercise price equalto the fair market value of the Company’s stock at the date of grant. Oncerepayments on the facility have been made, additional warrants are issued forincremental borrowings on the facility only to the extent that the newoutstanding borrowings balance exceeds the previous high outstanding borrowingsbalance. Approximately 31,700 additional warrants were earned in the quarterended December 31, 2002, and 46,600 additional warrants were earned in themonth of January 2003.  Those warrantswere issued in the quarter ending March 31, 2003. Interest costs related to theissuance of the warrants was approximately $9,000, which was expensed in thequarter ended March 31, 2003. Approximately 31,500 additional warrants, whichhave not yet been issued,  were earnedin the quarter ended March, 31, 2003. Interest costs related to issuance ofthese warrants were approximately $3,600.

 

During the nine monthsended March 31, 2003, cash and cash equivalents decreased  by $63,000. The negative effect on cashflows of  the net loss of $1,297,000 waspartially offset by other operating activities. Collections of accountsreceivable net of new billings amounted to $258,000 and reductions ininventory, including inventory write-downs of $215,000, contributed $452,000.Cash flow used in operations was $488,000. Proceeds from the revolving loan contributed$439,000. Property plant and equipment purchases totaled $14,000.

 

Company managementbelieves that the cash and cash equivalents on hand at May 14, 2003 and futureamounts available under the aforementioned credit facility will be adequate tomeet the Company’s cash requirements for the balance of the fiscal year endingJune 30, 2003, based on current revenue levels. However, given the substantialdecline in revenue for the quarter ($874,817) and nine months ($1,595,602)  ended March 31, 2003 compared to the prioryear quarter and nine months, if revenues continue to decline, or remain atcurrent levels, operations are likely to be substantially reduced. In addition,unless revenue increases significantly or operations are substantially reduced,these sources of cash will not be adequate to meet the Company’s cashrequirements during the fiscal year ending June 30, 2004, even if the Company’spresident continues the present financing arrangements beyond their currentexpiration date of September 30, 2003. There is no certainty that the existingcredit facility will be extended beyond this expiration date, and, unlessresults of operations improve, little likelihood that the Company would be ableto replace it.

 

COMMITMENTS AND CONTINGENCIES:

 

Warehouse facilities,office equipment, computer equipment and vehicles are leased undernon-cancelable operating leases. Minimum future obligations on these operating leases and amounts owingunder the revolving credit facility, at March 31, 2003, are as follows:

 

11

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ContractualObligation payments due by period

 
|                                                  |   | **1 Year** |      | **2-3  Years** |   | **4-5  years** |   | **Over 5  Years** |    | **Total** |   |
|-------------------------------------------------------|--------|------------|-----------|----------------|--------|----------------|--------|-------------------|---------|-----------|--------|
|                                                  |   |       |      |           |   |           |   |              |    |      |   |
| Operating leases                                      |   | $          | 35,792    |           | $      | 166,966        |   | $                 | 146,400 |      | $      | 135,200 |   | $ | 484,359 |   |
|                                                  |   |       |      |           |   |           |   |              |    |      |   |
| Revolving credit facility  (Line of Credit) |   | $          | 1,206,440 |           |   |           |   |              |    |      | $      | 1,206,440 |   |
|                                                  |   |       |      |           |   |           |   |              |    |      |   |
| Total                                                 |   | $          | 1,242,232 |           | $      | 166,966        |   | $                 | 146,400 |      | $      | 135,200 |   | $ | 1,690,799 |   |

 

CRITICAL ACCOUNTINGPOLICIES

 

The Company has creditpolicies that establish specific criteria related to credit worthiness that itscustomers must meet prior to the shipment of product to the customer. TheCompany periodically makes limited and selective exceptions to its policy ofnot shipping to customers with overdue balances when the particular customerhas met specific criteria which are indicative of a wherewithal to pay theirpast due and future balances.

 

The Company does notaccept returns from customers without its prior authorization. Returns aretypically accepted only for damaged or defective goods, or for pricing orshipping discrepancies. The Company reserves the right to refuse authorizationof any returns. If the Company accepts an unauthorized return or if a return isthe result of a customer error, the  customermay be subject to a 10% handling charge. The Company reserves the right tocancel open orders or backorders for those customers who abuse or excessivelyuse return privileges.

 

The Company believes thatthe selection and application of its accounting policies are appropriatelyreasoned. The following are the accounting policies that management believesrequire the most difficult, subjective or complex judgments about matters thatare inherently uncertain.

 

Inventory Valuation – Aninventory write-down is established to reduce inventory to the lower of cost ormarket for estimated surplus and discontinued inventory items. The amount ofthe inventory write-down is determined by analyzing historical and projectedsales information, plans for discontinued products and other factors. Changesin sales volumes due to unexpected economic or competitive conditions are amongthe factors that would result in materially different amounts for this item.Although there is considerable uncertainty in the continuation of current salestrends, additional substantial inventory write-downs may be required ifrevenues remain at current levels, or continue to decline in future periods.

 

Allowance for DoubtfulAccounts - An allowance is established for estimated uncollectible accountsreceivable. The required allowance is determined by reviewing customer accountsand making estimates of amounts that may be uncollectible. Factors consideredin determining the amount of the reserve include the age of the receivable, thefinancial condition of the customer, general business, and economic conditions,and other relevant facts and circumstances. Unexpected changes in theaforementioned factors would result in materially different amounts for thisitem.

 

Recognition of revenue****-****TheCompany recognizes revenue when title of goods passes to the customer.

 

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ACCOUNTING PRONOUNCEMENTS

 

In August 2001, the FASBissued SFAS No. 144*, Accounting for the Impairment or Disposal ofLong-Lived Assets*.  SFAS No.144 addresses financial accounting and reporting for the impairment or disposalof long-lived assets and supercedes SFAS No. 121, and the accounting andreporting provisions of Accounting Principles Board (APB) Opinion No. 30,*Reportingthe Results of Operations-Reporting the Effects of Disposal of a Segment of aBusiness and Extraordinary, Unusual, and Infrequently Occurring Transactions.*  SFAS No. 144 requires that long-lived assetsto be disposed of be measured at the lower of carrying amount or fair valueless cost to sell.  The Company hasadopted SFAS 144 in fiscal 2003, which had no effect on its financialstatements.

 

FASB issued SFAS No. 146*, Accountingfor Costs Associated with Exit or Disposal Activities.*  The Standard requires companies to recognizewith exit or disposal activities when they are incurred rather than at the dateof a commitment to an exit or disposal plan. SFAS No. 146 replaces previous accounting guidance provided by the EmergingIssues Task Force (EITF) Issue No. 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)* and is to be appliedprospectively to exit or disposal activities initiated after December 31, 2002.The Company has adopted SFAS146 which had no effect on the Company’s financialstatements.

 

The Company adopted thedisclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation- Transition and Disclosure”(“FAS 148”), which amends Statement of Financial Standards No. 123, “Accountingfor Stock-Based Compensation” (“FAS 123”).  The Company has continued to apply APBOpinion No. 25 and related interpretations in accounting for stock-basedcompensation plans.  FAS 148 providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  In addition, FAS 148 amends the disclosurerequirements of FAS 123 to require more prominent and more frequent disclosuresin financial statements of the effects of stock-based compensation.

 

COMMON STOCK LISTING

 

The Company’s CommonStock is quoted on the OTC Bulletin Board under the symbol “DOTX

 

Item 3.CONTROLS AND PROCEDURES

 

(a)                                  Evaluationof disclosure controls and procedures.

 

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Our chief executiveofficer and our chief financial officer, after evaluating the effectiveness ofthe Company’s disclosure controls and procedures as of May 14, 2003, (the“Evaluation Date”) have concluded that, as of the Evaluation Date, theCompany’s disclosure controls and procedures were adequate and designed toensure that material information relating to the Company would be made known tothem by others within the Company.

 

(b)                                 Changesin internal controls*.*

 

There were no significantchanges in the Company’s controls or in other factors that could significantlyaffect the Company’s disclosure controls and procedures subsequent to the dateof their most recent evaluation.

 

# PART II- OTHER INFORMATION

 

Item 6. Exhibits and Reportson Form 8-K

 

(a)                                                                                  Listingof Exhibits

 

99.1                           Certificationof Chief Executive Officer required pursuant to 18 U.S.C. §1350 as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

99.2                           Certificationof Chief Financial Officer required pursuant to 18 U.S.C. §1350 as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b)                                 Noreports on Form 8-K were issued during the quarter.

 

# SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| Date: May 14, 2003 |   | 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) |

 

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**SECTION 302 CERTIFICATIONS**

 

I, William S. Sadler,certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-QSB of Dotronix, Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofMay 14, 2003 (the “Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date  May 14, 2003 |   | By                            |  /s/ William S. Sadler |   |
|-------------------------|--------|-------------------------------|-----------------------------|--------|
|                    |   | William S. Sadler,  President |

 

 

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I, Robert V. Kling,certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-QSB of Dotronix, Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofMay 14, 2003 (the “Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date   | May 14, 2003 |   | By                                        | /s/ Robert V. Kling |   |
|--------|--------------|--------|-------------------------------------------|---------------------|--------|
|   |         |   | Robert V. Kling, Chief  Financial Officer |

 

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