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 theQuarter Ended March 31,  2002           Commission File No. 0-9996**

 

 

 

**DOTRONIX, INC.**

(Exact name of registrantas 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 reportsrequired to be filed by section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.

 

 

YES ý                                    NOo

 

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock as of the latest practicable date.

 

 

| Class                   |   | Outstanding at May  14, 2002 |
|-------------------------|--------|-----------------------------------|
| Common stock, par value |   | 4,171,341 shares                  |
| $.05 per share          |   |                              |

 

 

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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 |
|                            |   |   |
|                            |   |   |
| Part II - Other Information     |
|                            |   |   |
|                            |   |   |
|                            | Item 1. | Exhibits and  Reports on Form 8-K |

 

2

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PART I. FINANCIAL INFORMATION

##### ITEM 1. FINANCIALSTATEMENTS

**BALANCE SHEETS**

**DOTRONIX,INC.**

**(UNAUDITED)**

 
|                                                                                                                 |   | **March 31** |      | **June 30** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|--------------|-----------|-------------|--------|
| **ASSETS**                                                                                                           |   | **2002**     |      | **2001**    |   |
| Cash and cash  equivalents                                                                                           |   | $            | 39,802    |        | $      | 68,956 |   |
| Accounts  receivable, less allowance for doubtfulaccounts of $24,669and $46,610 respectively                         |   | 685,436      |      | 785,507     |   |
|                                                                                                                 |   |         |      |        |   |
| Inventories:                                                                                                         |   |         |      |        |   |
| Raw materials                                                                                                        |   | 953,652      |      | 1,168,000   |   |
| Work-in-process                                                                                                      |   | 301,910      |      | 256,891     |   |
| Finished goods                                                                                                       |   | 161,540      |      | 308,677     |   |
| Total  inventories                                                                                                   |   | 1,417,102    |      | 1,733,568   |   |
| Prepaid expenses                                                                                                     |   | 39,347       |      | 7,109       |   |
| Total current  assets                                                                                                |   | 2,181,687    |      | 2,595,140   |   |
|                                                                                                                 |   |         |      |        |   |
| PROPERTY, PLANT  & EQUIPMENT                                                                                     |   |         |      |        |   |
| at cost net of  accumulated depreciationof $5,477,088and $6,008,541  respectively                               |   | 802,349      |      | 924,972     |   |
|                                                                                                                 |   |         |      |        |   |
| OTHER ASSETS:                                                                                                        |   |         |      |        |   |
| Excess of cost  over fair value of net assets acquired,less amortization of $1,079,966 and $1,025,968,  respectively |   | 359,988      |      | 413,986     |   |
| Other                                                                                                                |   | 400          |      | 400         |   |
| TOTAL ASSETS                                                                                                         |   | $            | 3,344,424 |        | $      | 3,934,498 |   |
|                                                                                                                 |   |         |      |        |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                           |   |         |      |        |   |
| CURRENT  LIABILITIES:                                                                                                |   |         |      |        |   |
| Revolving loans                                                                                                      |   | $            | 683,863   |        | $      | 561,326 |   |
| Accounts payable                                                                                                     |   | 293,899      |      | 214,095     |   |
| Salaries, wages  and payroll taxes                                                                                   |   | 79,886       |      | 122,693     |   |
| Current  portion-deferred gain on sale of building                                                                   |   | 47,613       |      | 47,613      |   |
| Other accrued  liabilities                                                                                           |   | 65,801       |      | 66,670      |   |
| Total current  liabilities                                                                                           |   | 1,171,062    |      | 1,012,397   |   |
|                                                                                                                 |   |         |      |        |   |
| DEFERRED GAIN ON  SALE OF BUILDING                                                                                   |   | 289,645      |      | 325,355     |   |
|                                                                                                                 |   |         |      |        |   |
| STOCKHOLDERS'  EQUITY:                                                                                               |   |         |      |        |   |
| Common stock,  $.05 par value                                                                                        |   | 208,567      |      | 208,567     |   |
| Additional  paid-in capital                                                                                          |   | 10,919,976   |      | 10,919,976  |   |
| Unearned  compensation                                                                                               |   | —       |      | (2,375      | )      |
| Accumulated  deficit                                                                                                 |   | (9,244,826   | )         | (8,529,422  | )      |
| Total  stockholders' equity                                                                                          |   | 1,883,717    |      | 2,596,746   |   |
| TOTAL  LIABILITIES ANDSTOCKHOLDERS' EQUITY                                                                           |   | $            | 3,344,424 |        | $      | 3,934,498 |   |

 

See notes to financialstatements.

 

3

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**STATEMENTS OF OPERATIONS**

**DOTRONIX,INC.**

**(UNAUDITED)**

 
|                                       |   | **Three months ended,** |      | **Nine months ended,** |   |
|--------------------------------------------|--------|-------------------------|-----------|------------------------|--------|
|                                       |   | **March 31**            |      | **March  31**     |   |
|                                       |   |                    |      |                   |   |   |   |   |   |
|                                       |   | **2002**                |      | **2001**               |   | **2002** |   | **2001** |   |
|                                       |   |                    |      |                   |   |   |   |   |   |
| REVENUES                                   |   | $                       | 1,259,669 |                   | $      | 1,181,165 |   | $ | 2,909,251 |   | $ | 5,178,599 |   |
|                                       |   |                    |      |                   |   |   |   |   |   |
| OPERATING  EXPENSES:                       |   |                    |      |                   |   |   |   |   |   |
| Cost of sales                              |   | 951,307                 |      | 900,750                |   | 2,166,895 |   | 3,515,472 |   |
|                                       |   |                    |      |                   |   |   |   |   |   |
| Selling, general and adminstrative         |   | 474,255                 |      | 650,014                |   | 1,423,033 |   | 1,806,469 |   |
|                                       |   |                    |      |                   |   |   |   |   |   |
| Interest                                   |   | 10,574                  |      | 25,684                 |   | 34,727 |   | 91,294 |   |
|                                       |   |                    |      |                   |   |   |   |   |   |
| Net  (loss)                           |   | $                       | (176,467  | )                      | $      | (395,283 | ) | $ | (715,404 | ) | $ | (234,636 | ) |
|                                       |   |                    |      |                   |   |   |   |   |   |
|                                       |   |                    |      |                   |   |   |   |   |   |
| Basic and diluted net lossper common share |   | ($0.04                  | )         | ($0.09                 | )      | ($0.17 | ) | ($0.06 | ) |
|                                       |   |                    |      |                   |   |   |   |   |   |
| Average number of commonshares outstanding |   | 4,171,341               |      | 4,165,041              |   | 4,171,341 |   | 4,129,445 |   |

 

See notes to financialstatements.

 

4

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**STATEMENTS OF CASH FLOWS**

**DOTRONIX,INC**

**(UNAUDITED)**

 
|                                                                       |   | **Nine months ended** |     |
|----------------------------------------------------------------------------|--------|-----------------------|----------|
|                                                                       |   | **March 31**          |     |
|                                                                       |   | **2002**              |     | **2001** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                     |   |                  |     |   |   |
|                                                                       |   |                  |     |   |   |
| Net loss                                                                   |   | $                     | (715,404 | ) | $ | (234,636 | ) |
| Adjustment to  reconcile net loss to net cashused in operating activities: |   |                  |     |   |   |
| Depreciation and  amortization                                             |   | 211,803               |     | 266,269 |   |
| Stock  compensation                                                        |   | 2,375                 |     | 38,538 |   |
| Amortization of  deferred gain on sale of building                         |   | (35,710               | )        | (35,709 | ) |
| Change in assets  and liabilities:                                         |   |                  |     |   |   |
| Accounts  receivable                                                       |   | 100,071               |     | 796,837 |   |
| Inventories                                                                |   | 316,466               |     | 169,467 |   |
| Prepaid expenses                                                           |   | (32,238               | )        | (23,637 | ) |
| Accounts payable                                                           |   | 79,804                |     | (411,262 | )  |
| Salaries, wages  and payroll taxes payable                                 |   | (42,807               | )        | (106,934 | ) |
| Accrued  liabilities                                                       |   | (869                  | )        | (82,677 | )  |
|                                                                       |   |                  |     |   |   |
| NET CASH (USED  IN) PROVIDED BY OPERATING ACTIVITIES                       |   | (116,509              | )        | 376,256 |   |
|                                                                       |   |                  |     |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                     |   |                  |     |   |   |
| Purchase of  property, plant and equipment                                 |   | (35,182               | )        | (31,713 | ) |
|                                                                       |   |                  |     |   |   |
| NET CASH USED IN  INVESTING ACTIVITIES                                     |   | (35,182               | )        | (31,713 | ) |
|                                                                       |   |                  |     |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                     |   |                  |     |   |   |
| Borrowings on  revolving loan                                              |   | 3,264,000             |     | 5,709,000 |   |
| Repayments on  revolving loan                                              |   | (3,141,463            | )        | (5,996,206 | ) |
| Payments of  capital lease obligations                                     |   | —                |     | (33,256 | ) |
|                                                                       |   |                  |     |   |   |
| NET CASH  PROVIDED BY (USED IN) FINANCING ACTIVITIES                  |   | 122,537               |     | (320,462 | ) |
|                                                                       |   |                  |     |   |   |
| NET (DECREASE)  INCREASE IN CASHAND CASH EQUIVALENTS                       |   | (29,154               | )        | 24,081 |   |
|                                                                       |   |                  |     |   |   |
| CASH AND CASH  EQUIVALENTS ATBEGINNING OF THE PERIOD                       |   | 68,956                |     | 75,466 |   |
| CASH AND CASH  EQUIVALENTS AT END OF THE PERIOD                            |   | $                     | 39,802   |   | $ | 99,547 |   |

 

See notes tofinancial statements.

 

5

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DOTRONIX, INC.

NOTES TO FINANCIAL STATEMENTS

 

A.            Basis ofPresentation

 

The balance sheet as of March 31, 2002, the statements of operationsfor the three and nine month periods ended March 31, 2002 and 2001 and thestatements of cash flows for the nine month periods ended March 31, 2002 and2001 have been prepared by the Company without audit.  In the opinion of management, all adjustments (consisting only ofnormal recurring accruals) necessary to present fairly the financial position,results of operations and cash flows at March 31, 2002 and for three and ninemonth periods ended March 31, 2002 and 2001 presented herein have been made.

 

Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted. It is suggested that these financial statements be read in conjunctionwith the Company’s financial statements and notes thereto included in theAnnual Report on Form 10-KSB of the Company for the fiscal year ended June 30,2001.

 

 

B.            RevolvingLine of  Credit

 

On February 23, 2000, the Company entered into a revolving creditfacility with its president and major stockholder, and in September 2000 theCompany’s president and major stockholder extended the loan agreement toFebruary 28, 2002, and increased the loan limit to $1,250,000 in securedfinancing. In September 2001, the Company’s president and major stockholderextended the loan agreement to February 28, 2003 and increased the loan limitto $1,500,000 in secured financing

 

The revolving credit facility contains various restrictive covenantsincluding a minimum tangible net worth balance, which the president and majorstockholder agreed to reduce to $1.0 million in the first quarter of fiscal2002. As of May 14,  2002 the Companyhad $838,998 available under the revolving credit facility.

 

Interest on outstanding borrowings under the revolving credit facilityis accrued at the Wells Fargo Bank prime interest rate plus 3%. Additionally,the Company is required to issue warrants on the Company’s stock to thepresident and major shareholder for incremental increases in the outstandingborrowings balance.  One warrant isissued for every $4 in incremental borrowings made by the Company.  All warrants issued expire in 4 years andhave an exercise price equal to the fair market value of the Company’s stock atthe date of grant. Once repayments on the facility have been made, additionalwarrants are issued for incremental borrowings on the facility only to theextent that the new outstanding borrowings balance exceeds the previous highoutstanding borrowings balance. No additional warrants were issued in thecurrent  year.

 

Company managementbelieves that the cash and cash equivalents on hand at May 14, 2002 and futureamounts available under the aforementioned credit agreement should be adequateto meet cash requirements for the balance of the fiscal year. There is nocertainty that the existing credit facility will be extended beyond February28, 2003, or that the Company will be able to replace it.

6

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ITEM2. MANAGEMENT’SDISCUSSION AND ANALYSIS

# OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

 

 

RESULTS OF OPERATIONS

 

Revenue increased by $79,000, or 7%, for the three months ended March31, 2002, and decreased $2,269,000, or 44%, for the nine months ending March 31, 2002, compared to like periods inthe prior year.

 

In the three month  and ninemonths ended March  31, 2001, theCompany realized sales of approximately $640,000 and $2.9 million, respectively, of certain mature monochromeproducts. Comparable sales in the three months and nine months ended March 31,2002 were approximately $600,000 and $1.3 million, respectively. The monochromesales occurring in the nine months ended March 31, 2001  were the result of  the implementation ofa strategy to increase the order size and gross margins on these products byinforming customers of its intent to reduce capacity for the products.Monochrome product sales have declined since March 31, 2001, as ordersgenerated by the monochrome product strategy were completed and capacity wasreduced. Large screen color orders have also declined, as offshore competitionhas increased, and airport installations and other electronic display projectshave been cancelled or rescheduled.

 

The Company is continuing to develop turnkey solutions to variouselectronic digital display requirements of customers. Recent proposals includeda command and control system installation for a state highway department andseveral proposals to large fast food restaurant chains. Company managementbelieves that the strong presence in the video display market  it has created over many years ofsuccessful  operation  as a manufacturer of video display devicescan be built upon to change the Company from the provider of a single component, to providing the entire system. The Company’s efforts to develop anintegrated full service system product line has not contributed significantsales as of  March 31, 2002.

 

The gross margin percentage for the quarter ended March 31, 2002, was24%, the same as the quarter ended March  31, 2001. The gross marginpercentage for the nine months ended March 31, 2002, was 26%, compared to 32%,for the nine months ended March 31, 2001. The decline in the gross marginpercentage for the nine months ended March 31, 2002, from the prior year ninemonth period was due to the completion of the monochrome product strategyreferred to above.

 

Selling, general, and administrative expenses decreased $176,000, or27%, for the quarter ended March 31, 2002, and $383,000, or 21%, for the ninemonths ended March 31, 2002, when compared to the same periods in the prioryear. The decrease was due to significant expense reduction efforts, primarilyin employment levels and in the reduction of medical benefit costs.

 

7

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Interest expense decreased $15,000, or 59%, for the three months endedMarch 31, 2002, and $57,000, or 62%, for the nine months ended March 31, 2002,compared to the same periods of the prior year. Lower interest rates, and lowerborrowing requirements contributed to the decrease in interest expense. Also,no additional warrants related to the line of credit were issued.

 

As of March 31, 2002, the Company had available income tax operatingloss carry-forwards****that can be used to offset future taxableincome. The Company has recorded a valuation allowance against all benefitsassociated with net operating loss carry-forwards as it is less probable thannot that they will ultimately be realized.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

On February 23, 2000, the Company entered into a revolving creditfacility with its president and major stockholder, and in September 2000 theCompany’s president and major stockholder extended the loan agreement toFebruary 28, 2002, and increased the loan limit to $1,250,000 in securedfinancing. In September 2001, the Company’s president and major stockholderextended the loan agreement to February 28, 2003 and increased the loan limitto $1,500,000 in secured financing.

 

The revolving credit facility contains various restrictive covenantsincluding a minimum tangible net worth balance, which the president and majorstockholder agreed to reduce to $1.0 million in the first quarter of fiscal2002. As of May 14, 2002 the Company had $838,998 available under the  revolving credit facility.

 

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, 2002, are as follows:

 
|                                        |   | **1 Year** |    | **2-3 Years** |   | **4-5 years** |   | **Over 5  Years** |    | **Total** |   |
|---------------------------------------------|--------|------------|---------|---------------|--------|---------------|--------|-------------------|---------|-----------|--------|
|                                        |   |       |    |          |   |          |   |              |    |      |   |
| Operating leases                            |   | $          | 165,429 |          | $      | 170,346       |   | $                 | 147,199 |      | $      | 152,500 |   | $ | 635,474 |   |
|                                        |   |       |    |          |   |          |   |              |    |      |   |
| Revolving credit  facility (Line of Credit) |   | $          | 683,863 |          |   |          |   |              |    |      | $      | 683,863 |   |
|                                        |   |       |    |          |   |          |   |              |    |      |   |
| Total                                       |   | $          | 849,292 |          | $      | 170,346       |   | $                 | 147,199 |      | $      | 152,500 |   | $ | 1,319,337 |   |

 

During the nine months ended March 31, 2002, cash and cash equivalents decreasedby $29,000. The net cash used in operating activities was $117,000. Thenegative effect on cash flows of  thenet loss of $715,000, of which $178,000 were non-cash transactions, waspartially offset by other operating activities. Collections of accountsreceivable net of new billings amounted to $100,000 in increased cash.Inventory reductions provided $316,000 in cash flow. Additional cash activityincluded the purchase of property, plant, and equipment totaling $35,000 andadditional borrowings against the revolving loan in the amount of $123,000.

 

8

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Company managementbelieves that the cash and cash equivalents on hand at May 14, 2002 and futureamounts available under the aforementioned credit agreement should be adequateto meet cash requirements for the balance of the fiscal year. There is nocertainty that the existing credit facility will be extended beyond February28, 2003, or that the Company will be able to replace it.

 

 

CREDIT, RETURN AND OTHER CRITICAL ACCOUNTING POLICIES

 

The Company has credit policies that establish specific criteriarelated to credit worthiness that its customers must meet prior to the shipmentof product to the customer. The Company periodically makes limited and selectiveexceptions to its policy of not shipping to customers with overdue balanceswhen the particular customer has met specific criteria which are indicative ofa wherewithal to pay their past 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 customer may be subject to a 10% handling charge. The Company reservesthe right to cancel open orders or backorders for those customers who abuse orexcessively use return privileges.

 

The Company believes that the selection and application of itsaccounting policies are appropriately reasoned. The following are theaccounting policies that management believes require the most difficult,subjective or complex judgments about matters that are inherently uncertain.

 

Inventory Valuation - A reserve is established for estimated surplusand discontinued inventory items. The amount of the reserve is determined byanalyzing historical and projected sales information, plans for discontinuedproducts and other factors. Changes in sales volumes due to unexpected economicor competitive conditions are among the factors that would result in materiallydifferent amounts for this item.

 

Allowance for Doubtful Accounts - An allowance is established forestimated uncollectible accounts receivable. The required allowance isdetermined by reviewing customer accounts and making estimates of amounts thatmay be uncollectible. Factors considered in determining the amount of thereserve include the age of the receivable, the financial condition of thecustomer, general business, and economic conditions, and other relevant factsand circumstances. Unexpected changes in the aforementioned factors wouldresult in materially different amounts for this item.

 

9

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ACCOUNTING PRONOUNCEMENTS

 

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Account Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”.   SFAS No. 142  requires that upon adoption, amortization of goodwill will cease and instead, the carrying value of goodwill will be evaluated for impairment on an annual basis. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”. SFAS No. 142 is effective for the Company’s fiscal year beginning July 1, 2002. The Company is evaluating the impact of the adoption of this standard and has not yet determined the effect of adoption on its financial position and results of operations.

 

COMMON STOCK LISTING

 

The Company’s Common Stock previously was quoted on the NASDAQ StockMarket under the symbol “DOTX”. Effective August 4, 1999 the Company’s Common Stock transferred to theOTC Bulletin Board.

 

# PART II - OTHER INFORMATION

 

 

Item 6. Exhibits and reports on Form 8-K

 

                No reports on Form8-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 theundersigned thereunto duly authorized.

 
| Date:  May 14, 2002 |   | 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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