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: June 30, 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 July 29, 1998, the
Registrant had 2,838,555 shares of Common Stock, $.01 par value, outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No x
1
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
WINLAND ELECTRONICS, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash ................................................ $ 12,709 $ 23,542
Accounts Receivable, Net ............................ 1,863,785 1,581,368
Inventories ......................................... 4,522,727 3,753,342
Prepaid Items ....................................... 127,275 109,314
----------- -----------
Total Current Assets ................... 6,526,496 5,467,566
Property and Equipment, Net ......................... 3,213,875 3,141,279
Property Under Capital Lease, Net ................... 1,945,380 1,715,500
OTHER ASSETS:
Intangibles ............................ 6,270 7,034
Deferred Income Taxes .................. 17,741 17,741
----------- -----------
TOTAL ASSETS .............. $11,709,762 $10,349,120
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable .......................... $ 2,677,227 $ 1,733,227
Accounts Payable ....................... 853,847 1,200,177
Payroll Taxes Payable .................. 29,230 24,690
Wages and Commissions Payable .......... 61,592 61,150
Other Accruals ......................... 223,275 162,709
Obligations Under Capital Lease ........ 382,858 323,876
Deferred Revenue ....................... 27,001 27,001
Income Taxes Payable ................... 196,796 4,414
Current Maturities ..................... 172,702 170,730
----------- -----------
Total Current Liabilities . 4,624,528 3,707,974
LONG TERM LIABILITIES:
Long Term Maturities ................... 2,202,183 2,289,193
Obligations Under Capital Lease
Less: Current Portion .................. 1,414,833 1,254,268
----------- -----------
TOTAL LONG TERM LIABILITIES 3,617,016 3,543,461
OTHER LIABILITIES:
Deferred Revenue
Less: Current Portion .................. 175,506 189,006
----------- -----------
TOTAL LIABILITIES ......... 8,417,050 7,440,441
SHAREHOLDERS' EQUITY:
Common Stock ........................... 28,386 28,080
Additional Paid-In Capital ............. 2,091,916 2,079,001
Retained Earnings ...................... 1,172,410 801,598
----------- -----------
Total Shareholders' Equity 3,292,712 2,908,679
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ............ $11,709,762 $10,349,120
</TABLE>
2
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
1998 1997
----------- -----------
<S> <C> <C>
NET SALES: ....................................... $ 4,290,114 $ 2,983,529
Less, Cost of Goods Sold ............ 3,371,060 2,408,351
----------- -----------
Gross Profit on Sales ............... 919,054 575,178
OPERATING EXPENSES:
General and Administrative .......... 349,245 288,144
Marketing ........................... 70,755 58,115
Research and Development ............ 184,839 108,043
----------- -----------
Total Operating Expenses 604,839 454,302
INCOME BEFORE OTHER INCOME
AND EXPENSE ......................... 314,215 120,876
----------- -----------
MISCELLANEOUS INCOME ............................. 55,430 15,976
MISCELLANEOUS EXPENSE ............................ (3,173) --
INTEREST EXPENSE ................................. (65,632) (57,034)
----------- -----------
TOTAL OTHER INCOME & EXPENSE ........ (13,375) (41,058)
----------- -----------
NET INCOME BEFORE TAXES .......................... 300,840 79,818
----------- -----------
PROVISION FOR INCOME TAXES ....................... 105,303 584
----------- -----------
NET INCOME ....................................... $ 195,537 $ 79,234
BASIC EARNINGS PER SHARE ......................... $ 0.069 $ 0.028
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING ......................... 2,834,878 2,798,634
DILUTED EARNINGS PER SHARE ....................... $ 0.068 $ 0.028
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING, INCLUDING DILUTIVE SHARES ........... 2,875,712 2,860,449
</TABLE>
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
----------- -----------
<S> <C> <C>
NET SALES: ....................................... $ 8,693,075 $ 5,805,624
Less, Cost of Goods Sold ............ 6,943,135 4,564,503
----------- -----------
Gross Profit on Sales ............... 1,749,940 1,241,121
OPERATING EXPENSES:
General and Administrative .......... 661,819 552,149
Marketing ........................... 137,545 124,921
Research and Development ............ 351,571 208,216
----------- -----------
Total Operating Expenses 1,150,935 885,286
INCOME BEFORE OTHER INCOME
AND EXPENSE ......................... 599,005 355,835
----------- -----------
MISCELLANEOUS INCOME ............................. 95,651 24,839
MISCELLANEOUS EXPENSE & PROVISION
FOR BAD DEBT ........................ (3,633) (43,000)
INTEREST EXPENSE ................................. (120,543) (106,519)
----------- -----------
TOTAL OTHER INCOME & EXPENSE ........ (28,525) (124,680)
----------- -----------
NET INCOME BEFORE TAXES .......................... 570,480 231,155
----------- -----------
PROVISION FOR INCOME TAXES ....................... 199,668 23,584
----------- -----------
NET INCOME ....................................... $ 370,812 $ 207,571
BASIC EARNINGS PER SHARE ......................... $ 0.131 $ 0.074
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING ........................... 2,833,958 2,788,343
DILUTED EARNINGS PER SHARE ....................... $ 0.129 $ 0.073
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING INCLUDING DILUTIVE SHARES ............ 2,874,792 2,850,158
</TABLE>
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Cash Received from Customers ............................. $ 8,410,658 $ 5,561,568
Interest Received ........................................ 75,033 11,323
Other Miscellaneous Operating Receipts ................... 7,118 --
Cash Paid to Suppliers and Employees ..................... (8,728,423) (5,427,642)
Interest Paid ............................................ (249,376) (198,523)
Income Taxes Paid ........................................ (7,286) (1,168)
----------- -----------
Net Cash Provided (Used) by Operating Activities ..... (492,276) (54,442)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment ...................... (205,724) (97,804)
Cash Proceeds From Sales of Equipment .................... 484 --
----------- -----------
Net Cash Provided (Used) by Investing Activities .... (205,240) (97,804)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Advances on Credit Line .............................. 944,000 350,000
Proceeds from Debt ....................................... -- --
Payments on Debt ......................................... (85,039) (77,284)
Payments on Capital Lease Obligations .................... (185,500) (117,011)
Sale of Common Stock ..................................... 13,222 21,654
----------- -----------
Net Cash Provided by Financing Activities ............ 686,683 177,359
----------- -----------
NET INCREASE IN CASH .................................................. (10,833) 25,113
CASH - BEGINNING OF YEAR .............................................. 23,542 19,499
----------- -----------
CASH - END OF PERIOD .................................................. $ 12,709 $ 44,612
----------- -----------
RECONCILIATION OF NET INCOME TO NET CASH (USED)
BY OPERATING ACTIVITIES
Net Income (Loss) ..................................................... $ 370,812 $ 207,571
Adjustments:
Disposition of Assets ................................................. 3,633 15
Depreciation & Amortization ........................................... 304,942 202,904
(Increase) Decrease in Accounts Receivable ............................ (282,417) (201,056)
(Increase) Decrease in Inventory ...................................... (769,385) (444,533)
(Increase) Decrease in Prepaid Items .................................. (17,961) (62,116)
(Decrease) Increase in Accounts Payable ............................... (346,330) 271,602
(Decrease) Increase in Wages Payable .................................. 442 (760)
(Decrease) Increase in Accrued Payroll Taxes .......................... 4,540 (14,967)
(Decrease) Increase in Other Accruals ................................. 60,566 (21,652)
(Decrease) Increase in Deferred Revenue ............................... (13,500) (13,530)
(Decrease) Increase in Income Taxes Payable ........................... 192,382 22,080
----------- -----------
Net Cash Provided (Used) by Operating Activities ...................... $ (492,276) $ (54,442)
----------- -----------
</TABLE>
<PAGE>
WINLAND ELECTRONICS, INC.
NOTES TO THE INTERIM FINANCIAL STATEMENTS
JUNE 30, 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
$5,002 at June 30, 1998 and $5,074 at December 31, 1997.
NOTE C - INVENTORY
Major Components of inventory at June 30, 1998 and December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
Raw Materials ........................................... $3,475,136 $2,775,668
Work In Process ......................................... 548,112 490,428
Finished Goods .......................................... 485,739 479,900
Manufacturing, Shipping, and Office Supplies ............ 13,740 7,346
---------- ----------
Total ........................... $4,522,727 $3,753,342
---------- ----------
</TABLE>
A significant component of the raw materials inventory are materials procured
for Peoplenet Communications, Inc., which is not yet in full scale production,
monthly interest is being paid on this inventory.
NOTE D - PROPERTY AND EQUIPMENT
Property and Equipment not under capital leases consists of the following at
June 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Building ............................................... $ 2,387,171 $ 2,376,511
Land ................................................... 192,640 192,640
Office Equipment ....................................... 192,215 167,528
Computer & Telephone Equipment ......................... 503,044 402,444
Research & Development ................................. 128,966 110,608
Marketing and Display Equipment ........................ 18,152 18,152
Factory Equipment ...................................... 600,923 562,026
Land Improvements ...................................... 77,369 77,369
Accumulated Deprecation ................................ (886,605) (765,999)
----------- -----------
Net Book Value ................. $ 3,213,875 $ 3,141,279
----------- -----------
</TABLE>
6
<PAGE>
WINLAND ELECTRONICS, INC.
NOTES TO THE INTERIM FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
NOTE D - CONTINUED
Property and Equipment under capital leases consists of the following at June
30, 1998 and at December 31, 1997:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Factory Equipment ........................................................ $ 2,268,793 $ 1,982,281
Office Equipment ......................................................... 41,623 60,408
Computer & Telephone Equipment ........................................... 166,030 120,415
Research & Development ................................................... 42,335 9,396
Accumulated Amortization ................................................. (573,401) (457,000)
----------- -----------
Total Leased Property and Equipment, Net of
Accumulated Amortization ......................... $ 1,945,380 $ 1,715,500
----------- -----------
Capital Leases are summarized as follows:
Lease on factory equipment with lease period expiring
May of 2002, at an interest rate of 10.04% ............................... $ 53,529 $ 58,564
Lease on factory equipment with lease period expiring
June of 2002, at an interest rate of 10.04% .............................. 66,947 73,093
Lease on factory equipment with lease period expiring
March of 2002, at an interest rate of 9.94% .............................. 50,841 56,005
Lease on factory equipment with lease period expiring
March of 2002, at an interest rate of 8.88% .............................. 170,824 188,113
Lease on computer and telephone equipment with lease
period expiring February of 2000, at an interest rate of 9.01% ........... 24,775 31,019
Lease on factory equipment with lease period expiring
August of 2001, at an interest rate of 9.49% ............................. 178,840 200,999
Lease on factory equipment with lease period expiring
July of 2001, at an interest rate of 9.96% ............................... 85,416 95,354
Lease on factory and office equipment with lease period
expiring January of 2000, at interest of 1% over prime .................. 121,689 157,905
Lease on factory equipment with lease period expiring
October of 1998 at an interest rate of 9.23% ............................. 3,921 11,496
Lease on office equipment with lease period expiring
March of 2000 at an interest rate of 9% .................................. 11,146 13,882
Lease on factory and office equipment with lease period
expiring March of 2001 at an interest rate of 8.5% ....................... 71,575 --
Lease on factory and R&D equipment with lease period
expiring April of 2003 at an interest rate of 8.68% ...................... 45,240 --
Lease on factory equipment with lease period expiring
November of 2004 at an interest rate of 8.97% ............................ 578,711 607,456
Lease on factory equipment with lease period expiring
October of 2002 at an interest rate of 9.5% .............................. 38,870 18,910
Lease on factory equipment with lease period expiring
October of 2000 at an interest rate of 8.95% ............................. 23,481 27,908
Lease on factory equipment with lease period expiring
January of 2001 at an interest rate of 9.02% ............................. 61,578 37,440
Lease on factory equipment with lease period expiring
April of 2003 at an interest rate of 8.5% ................................ 86,766 --
Lease on factory equipment with lease period expiring
April of 2003 at an interest rate of 9.3% ................................ 123,542 --
----------- -----------
Total .................................................................... $ 1,797,691 $ 1,578,144
Less Current Portion ..................................................... (382,858) (323,876)
----------- -----------
Long Term Obligation Under Capital Leases ................................ $ 1,414,833 $ 1,254,268
----------- -----------
</TABLE>
7
<PAGE>
WINLAND ELECTRONICS, INC.
NOTES TO THE INTERIM FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
NOTE E - SHORT TERM BORROWING
Short term borrowing consists of the following at June 30, 1998 and December 31,
1997 balance sheet:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ----------
<S> <C> <C>
Norwest Bank - Revolving Credit Line
Balance ...................................................... $2,677,227 $1,733,227
Stated Interest Rate per Annum ............................... 9.0%* 9.0%*
Maximum Amount Outstanding During the Quarter ................ $2,677,227 $2,050,227
Average Amount Outstanding During the Quarter ................ $2,429,060 $1,842,073
Unused Credit Available ...................................... $ 822,773 $1,400,121
</TABLE>
* The stated interest rate per annum is an adjustable rate based on the current
leverage ratio, and was equal to 1/2 of a percent over prime rate at June 30,
1998. The interest on the revolving loan was $65,632 and $120,543 for the three
and six months ended June 30, 1998. Additional interest was reported related to
the leased capital equipment and other term borrowing. The interest expense on
leased equipment was $41,942 and $81,961 for the three and six months ended June
30, 1998. Interest expense on other long term borrowing was $32,465 and $65,416
for the three and six months ended June 30, 1998.
NOTE F - STOCK OPTIONS AND WARRANTS
As of June 30, 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 June 30, 1998, options to purchase
174,550 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 72,000 shares were granted and outstanding under the
1997 Stock Option Plan(the "1997 Plan") as of June 30, 1998, of which 18,000
shares were exercisable. The exercise price of options under the 1997 Plan
ranges+A25 from $2.375 to $3.125.
As of June 30, 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.
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Three and six months ended June 30, 1998 v.
Three and six months ended June 30, 1997
Net Sales:
The Company recorded net sales of $4,290,114 for the three months ended June 30,
1998, an increase of 44% from $2,983,529 for the same period in 1997. Net sales
of $8,693,075 were recorded for the first six months of 1998, compared to
$5,805,624 for the same period in 1997, a 50% increase. The increase in sales
for the second quarter and first six months of 1998 compared to 1997 is
primarily attributed to increases in sales to several OEM customers, with sales
to Select Comfort representing the largest increase over 1997 revenues. Sales of
the Company's security products experienced moderate increases for the second
quarter and first six months of 1998. The Company has in place several purchase
orders and manufacturing agreements with its OEM customers. The current purchase
orders with Select Comfort Corporation are in excess of $9 million dollars, and
are expected to be fulfilled in 1998 and early 1999. In addition, the Company
has a $5.5 million dollar manufacturing agreement with PeopleNet Communications,
Inc. 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.
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 $919,054 or 21.4% of net sales for the three months ended June
30, 1998, compared to $575,178 or 19.3% of net sales for the same period in
1997. For the first six months of 1998 the gross profit was $1,749,940 or 20.1%
of net sales, compared to $1,241,121 or 21.2% of net sales for the same period
in 1997. The increased gross profits, as a percentage net of sales, for the
second quarter of 1998 is primarily attributed to the steady sales growth with
the Company's OEM customers, as well as increases in sales of security products.
The slight decline in gross profits, as a percentage of net sales, for the first
six months of 1998, was due in part to the sales mix during the first quarter,
as well as expected lower margins associated with the production start up of the
new PeopleNet Communications product line.
Operating Expenses:
General and administrative expense was $349,245 or 8.1% of net sales for the
three months ended June 30, 1998, compared to $288,144 or 9.7% of net sales for
the same period in 1997. General and administrative expenses for the first six
months of 1998 were $661,819 or 7.6% of net sales, compared to $552,149 or 9.5%
of net sales for the same period in 1997. As a percentage of sales general and
administrative expense declined for both the second quarter and first six months
of 1998. The increases in the actual general and administrative expenses are
attributed to increased costs associated with the Company's expanded public
relations efforts, as well as additional costs necessary to support the higher
levels of sales during the second quarter and first six months of 1998.
Marketing and customer relations expense was $70,755 or 1.6% of net sales for
the three months ended June 30, 1998, compared to $58,115 or 1.9% of net sales
for the same period in 1997. Marketing and customer relations expense for the
first six months of 1998 was $137,545 or 1.6% of net sales, compared to $124,921
or 2.2% of net sales for the same period in 1997. As a percentage of sales,
marketing and customer relations expense declined for both the second quarter
and first six months of 1998. 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.
9
<PAGE>
Research and development expense was $184,839 or 4.3% of net sales for the three
months ended June 30, 1998, compared to $108,043 or 3.6% for the same period in
1997. For the first six months of 1998, research and development expense was
$351,571 or 4.0% of net sales compared to $208,216 or 3.6% of net sales for the
same period in 1997. The increase in research and development expense in both
actual dollars and as a percentage of sales for the three and six month periods
is primarily attributed to the addition of technical staff and equipment needed
to better service our customers' growing requirements for design and support
services.
Interest Expense:
Interest expense, including interest on the revolving line of credit, other long
and short-term borrowing, and interest on capital leases was $140,039 or 3.3% of
net sales for the three months ended June 30, 1998, compared to $104,603 or 3.5%
of net sales for the same period in 1997. Interest expense for the first six
months of 1998 was $267,920 or 3.1% of net sales, compared to $211,153 or 3.6%
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 $195,537 or $0.068 per diluted share and
$370,812 or $0.129 per diluted share for the three and six months ended June 30,
1998, compared to net income of $79,234 or $0.028 per diluted share and $207,571
or $0.073 per diluted share for the same periods in 1997. Net income before
taxes rose 178% to $300,840 from $79,818 for the second quarter 1998 compared to
the same period in 1997. Year to date net income before taxes rose 147% to
$570,480 from $231,155 for 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 147% and 79% for the second
quarter and first six months 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 June 30, 1998 was 1.41 to 1, compared to 1.47 to 1 on
December 31, 1997. Working capital on June 30, 1998 was $1,901,968 compared to
$1,759,592 on December 31, 1997. The increase in working capital is primarily
attributed to increases in accounts receivable and inventory that are offset by
additional short-term borrowing needed to support the increased sales levels for
the first six months of 1998. The increased inventory levels are attributed to
higher levels of raw materials held for PeopleNet Communications, Inc., which is
not yet in full scale production, monthly interest is being paid on this
inventory.
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 per
annum is an adjustable rate based on the current leverage ratio, and was equal
to 1/2% over the prime interest rate at June 30, 1998. At June 30, 1998, the
principle outstanding balance on the revolving line of credit was $2,677,227.
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.
Cautionary Statements
As provided for under the Private Securities Litigation Reform Act of 1995, the
Company wishes to caution investors that the following important factors, among
others, in some cases have affected and in the future could affect the Company's
actual results of operations and cause such results to differ materially from
those anticipated in forward-looking statements made in this document and
elsewhere by or on behalf of the Company.
The Company derives a significant portion of its revenues from a small number of
major OEM customers who are not subject to any long term contracts with the
Company.
10
<PAGE>
If any major customer should for any reason stop doing business with the
Company, the Company's business would be significantly adversely affected. The
Company's key customers are not large, well--established companies and the
business of each customer is subject to various risks such as market acceptance
of new products and continuing availability of financing . To the extent that
the Company's customers encounter difficulties, the Company could be adversely
affected.
The Company's ability to sustain continued increases in revenues and profits is
dependent upon its ability to retain existing customers and obtain new
customers. The Company competes for new customers with numerous independent
contract design and manufacturing firms in the United States and abroad, many of
whom have greater financial resources and a more established reputation. The
Company's ability to compete successfully in this industry depends upon the
price at which the Company is willing to manufacture a proposed product and the
quality of the Company's design and manufacturing services. There is no
assurance that the Company will be able to continue to win contracts from
existing and new customers on financially advantageous terms, and the failure to
do so could prevent the Company from achieving the growth it anticipates.
The operations and success of the Company depend upon the experience and
knowledge of W. Kirk Hankins, the Company's President and Chief Executive
Officer, and Lorin E. Krueger, the Company's Senior Vice President of
Operations. The loss of either Mr. Hankins or Mr. Krueger would have a material
adverse effect on the Company.
11
<PAGE>
PART II-OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is one of 18 defendants in a products liability case filed by
Debmar, Inc. and St. Paul Fire and Marine Insurance Company, as plaintiffs. The
Company reported this proceeding in its Form 10-KSB for the year ended December
31, 1997 and Form 10-QSB for the quarter ended March 31, 1998.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting on May 14, 1998
(b) Proxies for the Annual Meeting were solicited pursuant Regulation
14A under the Securities Exchange Act of 1934. There was no
solicitation in opposition to management's nominees as Listed in
the proxy statement, and all of such nominees were elected.
The shareholders set the number of directors at seven (7) by a
vote of 2,389,599 shares in favor, with 15,486 shares voted
against and 12,650 shares abstaining. The following persons were
elected to serve as directors of the Company until the next annual
meeting of shareholders with the following votes:
Number of Number of
Nominee Votes For Votes Withheld
W.Kirk Hankins 2,393,243 24,492
Lorin E. Krueger 2,399,643 18,092
Kirk P. Hankins 2,398,743 18,992
S. Robert Dessalet 2,395,348 22,387
Thomas J. de Petra 2,400,348 17,387
David L. Ewert 2,398,868 18,867
Peter D. Jones 2,398,064 19,671
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) A Form 8-K dated May 1, 1998 was filed to report the change of
audit firms.
12
<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: August 12, 1998 By: /s/ W. K. Hankins
William K. Hankins, President,
Chief Executive Officer and
Chief Financial Officer
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
13
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