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 Quarter Ended: March 31, 1998
Commission File Number: 0-18393
WINLAND ELECTRONICS, INC.
(Exact name of small business issuer as specified in its charter)
Minnesota 41-0992135
(state or other juris- (I.R.S. Employer
diction of incorporation) Identification No.)
1950 Excel Drive, Mankato, Minnesota 56001 (Address of
principal executive offices)(zip code)
Registrant's telephone number, including area code:
(507) 625-7231
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: As of May 5, 1998, the
Registrant had 2,833,039 shares of Common Stock, $.01 par value, outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No x
<PAGE>
PART I-FINANCIAL INFORMATION
WINLAND ELECTRONICS, INC.
BALANCE SHEET
(UNAUDITED)
March 31, December 31,
1998 1997
----------- -----------
CURRENT ASSETS:
Cash $ 134,445 $ 23,542
Accounts Receivable, Net 1,961,118 1,581,368
Inventories 4,466,325 3,753,342
Prepaid Items 90,742 109,314
----------- -----------
Total Current Assets 6,652,630 5,467,566
Property and Equipment, Net 3,226,062 3,141,279
Property Under Capital Lease, Net 1,761,090 1,715,500
OTHER ASSETS:
Intangibles 6,652 7,034
Deferred Income Taxes 17,741 17,741
----------- -----------
TOTAL ASSETS $11,664,175 $10,349,120
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable $ 2,557,227 $ 1,733,227
Accounts Payable 1,405,865 1,200,177
Payroll Taxes Payable 45,304 24,690
Wages and Commissions Payable 92,965 61,150
Other Accruals 135,632 162,709
Obligations Under Capital Lease 348,220 323,876
Deferred Revenue 27,001 27,001
Income Taxes Payable 93,865 4,414
Current Maturities 171,628 170,730
----------- -----------
Total Current Liabilities 4,877,707 3,707,974
LONG TERM LIABILITIES:
Long Term Maturities 2,246,021 2,289,193
Obligations Under Capital Lease
Less: Current Portion 1,272,737 1,254,268
----------- -----------
TOTAL LONG TERM LIABILITIES 3,518,758 3,543,461
OTHER LIABILITIES:
Deferred Revenue
Less: Current Portion 182,256 189,006
----------- -----------
TOTAL LIABILITIES 8,578,721 7,440,441
SHAREHOLDERS' EQUITY:
Common Stock 28,330 28,080
Additional Paid-In Capital 2,080,250 2,079,001
Retained Earnings 976,874 801,598
----------- -----------
Total Shareholders' Equity 3,085,454 2,908,679
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $11,664,175 $10,349,120
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
QUARTER ENDED
MARCH 31,
1998 1997
----------- -----------
NET SALES: $ 4,402,960 $ 2,822,095
Less, Cost of Goods Sold 3,572,075 2,156,152
----------- -----------
Gross Profit on Sales 830,885 665,943
OPERATING EXPENSES:
General and Administrative 312,574 264,005
Marketing 66,790 66,806
Research and Development 166,732 100,173
----------- -----------
Total Operating Expenses 546,096 430,984
INCOME BEFORE OTHER INCOME
AND EXPENSE 284,789 234,959
----------- -----------
MISCELLANEOUS INCOME 40,223 8,863
MISCELLANEOUS EXPENSE (460) (43,000)
INTEREST EXPENSE (54,911) (49,485)
----------- -----------
TOTAL OTHER INCOME & EXPENSE (15,148) (83,622)
----------- -----------
NET INCOME BEFORE TAXES 269,641 151,337
----------- -----------
PROVISION FOR INCOME TAXES 94,365 23,000
----------- -----------
NET INCOME $ 175,276 $ 128,337
BASIC EARNINGS PER SHARE $ 0.062 $ 0.046
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 2,833,039 2,776,384
DILUTED EARNINGS PER SHARE $ 0.061 $ 0.045
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING, INCLUDING DILUTIVE AHARES 2,867,882 2,836,684
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C> <C>
Cash Received from Customers $ 4,022,940 $ 2,707,935
Interest Received 31,473 2,128
Other Miscellaneous Operating Receipts 2,000 --
Cash Paid to Suppliers and Employees (4,361,084) (2,724,098)
Interest Paid (128,143) (109,094)
Income Taxes Paid (4,914) (920)
----------- -----------
Net Cash Provided (Used) by Operating Activities (437,728) (124,049)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (148,558) (48,944)
Cash Proceeds From Sales of Equipment 200 --
----------- -----------
Net Cash Provided (Used) by Investing Activities (148,358) (48,944)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Advances on Credit Line 824,000 355,000
Proceeds from Debt -- --
Payments on Debt (42,277) (41,110)
Payments on Capital Lease Obligations (86,234) (52,738)
Sale of Common Stock 1,500 2,891
----------- -----------
Net Cash Provided by Financing Activities 696,989 264,043
----------- -----------
NET INCREASE IN CASH 110,903 91,050
CASH - BEGINNING OF YEAR 23,542 19,499
----------- -----------
CASH - END OF PERIOD $ 134,445 $ 110,549
----------- -----------
RECONCILIATION OF NET INCOME TO NET CASH (USED)
BY OPERATING ACTIVITIES
Net Income (Loss) $ 175,276 $ 128,337
Adjustments:
Disposition of Assets 460 15
Depreciation & Amortization 146,956 102,813
(Increase) Decrease in Accounts Receivable (379,750) (71,160)
(Increase) Decrease in Inventory (712,983) (311,138)
(Increase) Decrease in Prepaid Items 18,572 (28,520)
(Decrease) Increase in Accounts Payable 205,688 38,306
(Decrease) Increase in Wages Payable 31,815 22,437
(Decrease) Increase in Accrued Payroll Taxes 20,614 (3,092)
(Decrease) Increase in Other Accruals (27,077) (17,377)
(Decrease) Increase in Deferred Revenue (6,750) (6,750)
(Decrease) Increase in Income Taxes Payable 89,451 22,080
----------- -----------
Net Cash Provided (Used) by Operating Activities $ (437,728) $ (124,049)
----------- -----------
</TABLE>
<PAGE>
WINLAND ELECTRONICS, INC.
NOTES TO THE INTERIM FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by the
Company in accordance with generally accepted accounting principles, pursuant to
the rules and regulations of the Securities and Exchange Commission. In
management's opinion all adjustments necessary to a fair presentation of the
results for the interim period have been reflected in the interim financial
statements. The results of operations for any interim period are not necessarily
indicative of the results for a full year. Except for those described in note B
below, all other adjustments are of a normal recurring nature. Certain
information and footnote disclosures normally included in financial statements
have been condensed or omitted. Such disclosures are those that would
substantially duplicate information contained in the most recent audited
financial statements of the Company, such as significant accounting policies,
net operating loss carry-overs, lease and license commitments and stock options.
Management presumes that users of the interim statements have read or have
access to the audited financial statements included in the Company's most recent
annual report on Form 10-KSB.
NOTE B - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts based on the aging of
accounts receivable. The balance of the allowance for doubtful accounts is
$5,074 at March 31, 1998 and $5,074 at December 31, 1997.
NOTE C - INVENTORY
Major Components of inventory at March 31, 1998 and December 31, 1997 are as
follows:
March 31, December 31,
1998 1997
---------- ----------
Raw Materials $3,483,393 $2,775,668
Work In Process 434,772 490,428
Finished Goods 536,665 479,900
Manufacturing, Shipping, and Office Supplies 11,495 7,346
---------- ----------
Total $4,466,325 $3,753,342
NOTE D - PROPERTY AND EQUIPMENT
Property and Equipment not under capital leases consists of the following at
March 31, 1998 and December 31, 1997:
March 31, December 31,
1998 1997
----------- -----------
Building $ 2,376,511 $ 2,376,511
Land 192,640 192,640
Office Equipment 183,481 167,528
Computer & Telephone Equipment 469,047 402,444
Research & Development 128,966 110,608
Marketing and Display Equipment 18,152 18,152
Factory Equipment 606,598 562,026
Land Improvements 77,369 77,369
Accumulated Deprecation (826,702) (765,999)
----------- -----------
Net Book Value $ 3,226,062 $ 3,141,279
<PAGE>
WINLAND ELECTRONICS, INC.
NOTES TO THE INTERIM FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE D - CONTINUED
Property and Equipment under capital leases consists of the following at March
31, 1998 and at December 31, 1997:
March 31, December 31,
1998 1997
----------- -----------
Factory Equipment $ 1,991,070 $ 1,982,281
Office Equipment 41,623 60,408
Computer & Telephone Equipment 169,985 120,415
Research & Development 42,335 9,396
Accumulated Amortization (483,923) (457,000)
----------- -----------
Total Leased Property and Equipment, Net of
Accumulated Amortization $ 1,761,090 $ 1,715,500
----------- -----------
<TABLE>
<S> <C> <C>
Capital Leases are summarized as follows:
Lease on factory equipment with lease period expiring
May of 2002, at an interest rate of 10.04% $ 56,078 $ 58,564
Lease on factory equipment with lease period expiring
June of 2002, at an interest rate of 10.04% 70,058 73,093
Lease on factory equipment with lease period expiring
March of 2002, at an interest rate of 9.94% 53,455 56,005
Lease on factory equipment with lease period expiring
March of 2002, at an interest rate of 8.88% 179,564 188,113
Lease on computer and telephone equipment with lease
period expiring February of 2000, at an interest rate of 9.01% 27,932 31,019
Lease on factory equipment with lease period expiring
August of 2001, at an interest rate of 9.49% 190,051 200,999
Lease on factory equipment with lease period expiring
July of 2001, at an interest rate of 9.96% 90,446 95,354
Lease on factory and office equipment with lease period
expiring January of 2000, at interest of 1% over prime 139,249 157,905
Lease on factory equipment with lease period expiring
October of 1998 at an interest rate of 9.23% 7,752 11,496
Lease on office equipment with lease period expiring
March of 2000 at an interest rate of 9% 12,530 13,882
Lease on factory and office equipment with lease period
expiring March of 2001 at an interest rate of 8.5% 77,015 --
Lease on factory and R&D equipment with lease period
expiring April of 2003 at an interest rate of 8.68% 46,981 --
Lease on factory equipment with lease period expiring
November of 2004 at an interest rate of 8.97% 593,702 607,456
Lease on factory equipment with lease period expiring
October of 2002 at an interest rate of 9.5% 17,846 18,910
Lease on factory equipment with lease period expiring
October of 2000 at an interest rate of 8.95% 25,719 27,908
Lease on factory equipment with lease period expiring
January of 2001 at an interest rate of 9.02% 32,579 37,440
----------- -----------
Total $ 1,620,957 $ 1,578,144
Less Current Portion (348,220) (323,876)
----------- -----------
Long Term Obligation Under Capital Leases $ 1,272,737 $ 1,254,268
</TABLE>
<PAGE>
WINLAND ELECTRONICS, INC.
NOTES TO THE INTERIM FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE E - SHORT TERM BORROWING
Short term borrowing consists of the following at March 31, 1998 and December
31, 1997 balance sheet:
March 31, December 31,
1998 1997
----------- -----------
Norwest Bank - Revolving Credit Line
Balance $2,557,227 $1,733,227
Stated Interest Rate per Annum 9.0%* 9.0%*
Maximum Amount Outstanding During the Quarter $2,557,227 $2,050,227
Average Amount Outstanding During the Quarter $2,212,560 $1,842,073
Unused Credit Available $ 942,773 $1,400,121
* The stated interest rate per annum was equal to 1/2 of a percent over prime
rate. The interest on the revolving loan was $54,911 for the three months ended
March 31, 1998. Additional interest was reported related to the leased capital
equipment and other term borrowing. The interest expense on leased equipment was
$39,959 for the three months ended March 31, 1998. Interest expense on other
long term borrowing was $32,952 for the three months ended March 31, 1998.
NOTE F - STOCK OPTIONS AND WARRANTS
As of March 31, 1998, options to purchase an aggregate of 278,000 shares of the
Company's common stock were granted and outstanding under the Company's 1989
Stock Option Plan(the "1989 Plan"). As of March 31, 1998, options to purchase
160,050 shares granted under the 1989 Plan were exercisable. The exercise prices
of all outstanding options under the 1989 Plan range from $0.125to $3.64 per
share. Options to purchase 60,000 shares were granted and outstanding under the
1997 Stock Option Plan(the "1997 Plan"), as of March 31, 1998, 6,000 shares were
exercisable. The exercise price of options under the 1997 Plan range from $2.375
to $3.125.
As of March 31, 1998, warrants to purchase an aggregate of 37,000 shares of the
Company's Common Stock at $2.20 per share were granted and outstanding, all of
which warrants are exercisable.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Three months ended March 31, 1998 v.
Three months ended March 31, 1997
Net Sales:
The Company recorded net sales of $4,402,960 for the three months ended March
31, 1998, an increase of 56% from $2,822,095 for the same period in 1997. The
increase in sales for the first quarter of 1998 compared to 1997 is primarily
attributed to increases in sales to Select Comfort Corporation. The current
purchase orders with Select Comfort Corporation are in excess of $9.6 million,
and are expected to be fulfilled in 1998 and early 1999. In addition to the
increased sales to Select Comfort Corporation, sales to PeopleNet
Communications, Inc. increased significantly during the first three months of
1998 compared to 1997, marking the beginning of production of the $5.5 million
dollar manufacturing agreement to be fulfilled in 1998 and 1999. The Company
also has purchase agreements with Keyless Door Lock Company for $325,000, and a
$2 million dollar, three year, manufacturing agreement with CIC Systems (NZ),
Inc. In addition to the above mentioned contracts, the Company continues to
initiate new OEM customer relationships, and has signed firm manufacturing
agreements for smaller amounts with two new customers who fit our customer
profile. During the first quarter of 1998, the Company has continued to actively
market its security/ industrial products, and has maintained consistent sales
for the three months ended March 31, 1998, compared to 1997.
The Company has continued to position itself as a full service designer and
manufacturer of custom controls and assemblies for OEM customers. The loss of
any OEM customer could have an adverse effect on the Company's short-term
results. The Company's marketing research indicates that there is a large
potential market for electronic design and manufacturing services and that this
market is growing rapidly.
Gross Profits:
Gross profit was $830,885 or 18.9% of net sales for the three months ended March
31, 1998, compared to $665,943 or 23.6% of net sales for the same period in
1997. The reduction in gross profits, as a percentage of sales, is primarily
attributed to the sales mix during the first quarter of 1998 since the OEM
product sales generally produce lower gross margins than the lower volume
proprietary products manufactured by the Company. The lower gross profits were
also due to expected lower gross margins associated with the production start up
of the new Peoplenet Communications product line.
Operating Expenses:
General and administrative expense was $312,574 or 7.1% of net sales for the
three months ended March 31, 1998, compared to $264,005 or 9.4% of net sales for
the same period in 1997. As a percentage of sales general and administrative
expense declined. The actual general and administrative expense increase is
primarily attributed increased costs associated with the Company's expanded
public relations efforts, coordinated by Padilla, Spear and Beardsley, and
consulting consulting services provided by Inc. Business Resources to assist in
the promotion of the Company to the investment community.
Marketing and customer relations expense was $66,790 or 1.5% of net sales for
the three months ended March 31, 1998, compared to $66,806 or 2.4% of net sales
for the same period in 1997. Marketing and customer relations expense remained
steady for the first quarter of 1998, compared to 1997. As a percentage of net
sales, marketing and customer relations expense declined for the period,
compared to 1997. The Company has continued to expand its efforts to secure new,
long-term OEM customer relationships to design and manufacture custom controls
and assemblies. The Company also continues to actively market its
security/industrial products.
<PAGE>
Research and development expense was $166,732 or 3.8% of net sales for the three
months ended March 31, 1998, an increase from $100,773 or 3.5% of net sales for
the same period in 1997. The increase in research and development expense is
primarily attributed to the addition of technical staff and equipment needed to
better service our customers' growing requirements for design and support
services. As a percentage of sales, research and development expense declined
for the period.
Interest Expense:
Interest expense, including interest on the revolving line of credit, other long
and short-term borrowing, and interest on capital leases was $127,822 or 2.9% of
net sales for the three months ended March 31, 1998, compared to $106,550 or
3.8% of net sales for the same period in 1997. The increase in interest expense
reflected additional short-term borrowing and borrowing through capital leases
needed to support increased sales volumes.
Net Earnings:
The Company reported net income of $175,366 or $0.061 per diluted share for the
three months ended March 31, 1998, compared to net income of $128,337 or $0.045
per diluted share for the same period in 1997. Net income before taxes rose 78%
to $269,641 from $151,337 for the first quarter 1998 compared to the same period
in 1997. The provision for income taxes for 1997 included tax loss
carry-forwards, which will be used up in 1998. As a result of this net income
after tax rose 37% for the first quarter of 1998 compared to 1997.
The Company believes inflation has not significantly affected its results of
operations.
Liquidity and Capital Resources
The current ratio on March 31, 1998 was 1.36 to 1, compared to 1.47 to 1 on
December 31, 1997. Working capital on March 31, 1998 was $1,774,923 compared to
$1,759,592 on December 31, 1997. The increase in working capital is primarily
attributed to increases in cash, accounts receivable, and inventory, that are
offset by additional short-term borrowing needed to support the increased sales
during the first three months of 1998.
The Company has a revolving credit agreement with the Norwest Bank Minnesota
South N.A.("Norwest"), with a maximum loan limit of $3,500,000, subject to
additional limitations set forth in the credit agreement. The interest rate is
calculated at 1/2% over the prime interest rate. At March 31, 1998, the
principle outstanding balance on the revolving line of credit was 2,557,224. The
Company's management believes that capital available through the current credit
agreement, together with cash flows from operations will be sufficient to meet
the Company's capital needs in the near future.
<PAGE>
PART II-OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is one of 18 different companies who are defendants in a products
liability case. The plaintiffs are Debmar, Inc. and St. Paul Fire and Marine
Insurance Company. It is venued in the Superior Court of Maricopa County,
Phoenix, Arizona. The case was filed in May of 1997, although it was not served
on the Company until a few months later. The plaintiff Debmar is a company that
provides vaccines to various medical entities, and St. Paul Fire and Marine is
Debmar's insurance carrier. Debmar claims that a refrigeration system that it
purchased to store certain vaccines was defective, causing a drop in the
refrigeration system's temperatures in May of 1995 and an alleged subsequent
substantial loss of vaccines. Debmar's insurance carrier paid for the economic
loss and is now seeking indemnification for the payment from virtually all of
the companies that had any relationship in manufacturing component parts for the
refrigeration system, distributing or maintaining the refrigeration system. The
amount of the claimed loss is in excess of $1.1 million. It appears that the
Company is a party in this case because it produced a small component of the
larger refrigeration system.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibit to this report is:
27.1 Financial Data Schedule (included in electronic version only)
(b) There are no reports on Form 8-K for the quarter ended March 31, 1998.
Subsequently, a Form 8-K dated May 1, 1998 was filed to report the
change of audit firms.
<PAGE>
SIGNATURES
Pursuant to the requirement 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.
WINLAND ELECTRONICS, INC.
Dated: May 12, 1998 By: /s/ William K. Hankins
William K. Hankins, President,
Chief Executive Officer and
Chief Financial Officer
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U. S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 134,445
<SECURITIES> 0
<RECEIVABLES> 1,966,192
<ALLOWANCES> 5,074
<INVENTORY> 4,466,325
<CURRENT-ASSETS> 6,652,630
<PP&E> 6,297,777
<DEPRECIATION> 1,310,625
<TOTAL-ASSETS> 11,664,175
<CURRENT-LIABILITIES> 4,877,707
<BONDS> 2,005,280
28,330
0
<COMMON> 0
<OTHER-SE> 3,057,124
<TOTAL-LIABILITY-AND-EQUITY> 11,664,175
<SALES> 4,402,960
<TOTAL-REVENUES> 4,443,183
<CGS> 3,572,075
<TOTAL-COSTS> 4,118,171
<OTHER-EXPENSES> 55,371
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,911
<INCOME-PRETAX> 269,641
<INCOME-TAX> 94,365
<INCOME-CONTINUING> 175,276
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 175,276
<EPS-PRIMARY> 0.062
<EPS-DILUTED> 0.061
</TABLE>
