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: September 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 November 1, 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
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
WINLAND ELECTRONICS, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash $ 4,773 $ 23,542
Accounts Receivable, Net 2,267,569 1,581,368
Inventories 4,638,434 3,753,342
Prepaid Items 68,299 109,314
----------- -----------
Total Current Assets 6,979,075 5,467,566
Property and Equipment, Net 3,298,859 3,141,279
Property Under Capital Lease, Net 1,839,733 1,715,500
OTHER ASSETS:
Intangibles 5,887 7,034
Deferred Income Taxes 17,741 17,741
----------- -----------
TOTAL ASSETS $12,141,295 $10,349,120
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable $ 2,454,227 $ 1,733,227
Accounts Payable 1,206,219 1,200,177
Payroll Taxes Payable 37,849 24,690
Wages and Commissions Payable 90,697 61,150
Other Accruals 284,325 162,709
Obligations Under Capital Lease 390,239 323,876
Deferred Revenue 27,001 27,001
Income Taxes Payable 278,802 4,414
Current Maturities 173,939 170,730
----------- -----------
Total Current Liabilities 4,943,298 3,707,974
LONG TERM LIABILITIES:
Long Term Maturities 2,273,498 2,289,193
Obligations Under Capital Lease
Less: Current Portion 1,307,132 1,254,268
----------- -----------
TOTAL LONG TERM LIABILITIES 3,580,630 3,543,461
OTHER LIABILITIES:
Deferred Revenue
Less: Current Portion 168,755 189,006
----------- -----------
TOTAL LIABILITIES 8,692,683 7,440,441
SHAREHOLDERS' EQUITY:
Common Stock 28,386 28,080
Additional Paid-In Capital 2,091,916 2,079,001
Retained Earnings 1,328,310 801,598
----------- -----------
Total Shareholders' Equity 3,448,612 2,908,679
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $12,141,295 $10,349,120
</TABLE>
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30,
1998 1997
----------- -----------
<S> <C> <C>
NET SALES: $ 4,117,831 $ 2,854,539
Less, Cost of Goods Sold 3,238,929 2,194,408
----------- -----------
Gross Profit on Sales 878,902 660,131
OPERATING EXPENSES:
General and Administrative 299,462 197,909
Marketing 69,651 59,798
Research and Development 179,264 113,852
----------- -----------
Total Operating Expenses 548,377 371,559
INCOME BEFORE OTHER INCOME
AND EXPENSE 330,525 288,572
----------- -----------
MISCELLANEOUS INCOME 48,461 19,675
MISCELLANEOUS EXPENSE & PROVISION
FOR BAD DEBT -- (19,400)
INTEREST EXPENSE (139,140) (112,897)
----------- -----------
TOTAL OTHER INCOME & EXPENSE (90,679) (112,622)
----------- -----------
NET INCOME BEFORE TAXES 239,846 175,950
----------- -----------
PROVISION FOR INCOME TAXES 83,946 584
----------- -----------
NET INCOME $ 155,900 $ 175,366
BASIC EARNINGS PER SHARE $ 0.055 $ 0.063
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 2,838,555 2,803,881
DILUTED EARNINGS PER SHARE $ 0.054 $ 0.061
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING, INCLUDING DILUTIVE SHARES 2,883,244 2,866,666
</TABLE>
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
NET SALES: $ 12,810,906 $ 8,660,164
Less, Cost of Goods Sold 10,055,376 6,673,510
------------ ------------
Gross Profit on Sales 2,755,530 1,986,654
OPERATING EXPENSES:
General and Administrative 942,552 730,825
Marketing 207,009 184,720
Research and Development 529,063 322,067
------------ ------------
Total Operating Expenses 1,678,624 1,237,612
INCOME BEFORE OTHER INCOME
AND EXPENSE 1,076,906 749,042
------------ ------------
MISCELLANEOUS INCOME 144,113 44,513
MISCELLANEOUS EXPENSE & PROVISION
FOR BAD DEBT (3,633) (62,400)
INTEREST EXPENSE (407,060) (324,051)
------------ ------------
TOTAL OTHER INCOME & EXPENSE (266,580) (341,938)
------------ ------------
NET INCOME BEFORE TAXES 810,326 407,104
------------ ------------
PROVISION FOR INCOME TAXES 283,614 24,168
------------ ------------
NET INCOME $ 526,712 $ 382,936
BASIC EARNINGS PER SHARE $ 0.186 $ 0.137
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 2,835,491 2,793,522
DILUTED EARNINGS PER SHARE $ 0.183 $ 0.134
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING INCLUDING DILUTIVE SHARES 2,880,180 2,856,307
</TABLE>
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Cash Received from Customers $ 12,124,705 $ 8,684,470
Interest Received 111,433 22,411
Other Miscellaneous Operating Receipts 12,430 1,400
Cash Paid to Suppliers and Employees (11,930,535) (7,991,729)
Interest Paid (413,055) (326,595)
Income Taxes Paid (9,226) (1,752)
------------ ------------
Net Cash Provided (Used) by Operating Activities (104,248) 388,205
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (350,920) (215,473)
Cash Proceeds From Sales of Equipment 484 3,165
------------ ------------
Net Cash Provided (Used) by Investing Activities (350,436) (212,308)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Advances on Credit Line 721,000 242,000
Proceeds from Debt 115,000 --
Payments on Debt (127,485) (119,005)
Payments on Capital Lease Obligations (285,822) (172,139)
Sale of Common Stock 13,222 21,654
------------ ------------
Net Cash Provided by Financing Activities 435,915 (27,490)
------------ ------------
NET INCREASE IN CASH (18,769) 148,407
CASH - BEGINNING OF YEAR 23,542 19,499
------------ ------------
CASH - END OF PERIOD $ 4,773 $ 167,906
------------ ------------
RECONCILIATION OF NET INCOME TO NET CASH (USED)
BY OPERATING ACTIVITIES
Net Income (Loss) $ 526,712 $ 382,936
Adjustments:
Disposition of Assets 3,633 (407)
Depreciation & Amortization 471,184 315,266
(Increase) Decrease in Accounts Receivable (686,201) 86,706
(Increase) Decrease in Inventory (885,092) (350,554)
(Increase) Decrease in Prepaid Items 41,015 (72,234)
(Decrease) Increase in Accounts Payable 6,042 (6,061)
(Decrease) Increase in Wages Payable 29,547 24,648
(Decrease) Increase in Accrued Payroll Taxes 13,159 (7,454)
(Decrease) Increase in Other Accruals 121,616 13,530
(Decrease) Increase in Deferred Revenue (20,251) (20,251)
(Decrease) Increase in Income Taxes Payable 274,388 22,080
------------ ------------
Net Cash Provided (Used) by Operating Activities $ (104,248) $ 388,205
------------ ------------
</TABLE>
<PAGE>
WINLAND ELECTRONICS, INC.
NOTES TO THE INTERIM FINANCIAL STATEMENTS
SEPTEMBER 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
$4,784 at September 30, 1998 and $5,074 at December 31, 1997.
NOTE C - INVENTORY
Major Components of inventory at September 30, 1998 and December 31, 1997 are as
follows:
September 30, December 31,
1998 1997
---------- ----------
Raw Materials $3,499,976 $2,775,668
Work In Process 692,177 490,428
Finished Goods 432,024 479,900
Manufacturing, Shipping, and Office Supplies 14,257 7,346
---------- ----------
Total $4,638,434 $3,753,342
---------- ----------
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
September 30, 1998 and December 31, 1997:
September 30, December 31,
1998 1997
----------- -----------
Building $ 2,490,230 $ 2,376,511
Land 192,640 192,640
Office Equipment 194,659 167,528
Computer & Telephone Equipment 535,676 402,444
Research & Development 128,966 110,608
Marketing and Display Equipment 18,152 18,152
Factory Equipment 622,784 562,026
Land Improvements 77,369 77,369
Accumulated Deprecation (961,617) (765,999)
----------- -----------
Net Book Value $ 3,298,859 $ 3,141,279
----------- -----------
6
<PAGE>
WINLAND ELECTRONICS, INC.
NOTES TO THE INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE D - CONTINUED
Property and Equipment under capital leases consists of the following at
September 30, 1998 and at December 31, 1997:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Factory Equipment $ 2,253,994 $ 1,982,281
Office Equipment 41,623 60,408
Computer & Telephone Equipment 166,030 120,415
Research & Development 42,335 9,396
Accumulated Amortization (664,249) (457,000)
----------- -----------
Total Leased Property and Equipment, Net of
Accumulated Amortization $ 1,839,733 $ 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% $ 50,916 $ 58,564
Lease on factory equipment with lease period expiring
June of 2002, at an interest rate of 10.04% 63,757 73,093
Lease on factory equipment with lease period expiring
March of 2002, at an interest rate of 9.94% 48,161 56,005
Lease on factory equipment with lease period expiring
March of 2002, at an interest rate of 8.88% 161,889 188,113
Lease on computer and telephone equipment with lease
period expiring February of 2000, at an interest rate of 9.01% 21,546 31,019
Lease on factory equipment with lease period expiring
August of 2001, at an interest rate of 9.49% 167,363 200,999
Lease on factory equipment with lease period expiring
July of 2001, at an interest rate of 9.96% 80,259 95,354
Lease on factory and office equipment with lease period
expiring January of 2000, at interest of 1% over prime 103,676 157,905
Lease on factory equipment with lease period expiring
October of 1998 at an interest rate of 9.23% -- 11,496
Lease on office equipment with lease period expiring
March of 2000 at an interest rate of 9% 9,731 13,882
Lease on factory and office equipment with lease period
expiring March of 2001 at an interest rate of 8.5% 66,018 --
Lease on factory and R&D equipment with lease period
expiring April of 2003 at an interest rate of 8.68% 43,461 --
Lease on factory equipment with lease period expiring
November of 2004 at an interest rate of 8.97% 563,380 607,456
Lease on factory equipment with lease period expiring
October of 2002 at an interest rate of 9.5% 37,204 18,910
Lease on factory equipment with lease period expiring
October of 2000 at an interest rate of 8.95% 21,192 27,908
Lease on factory equipment with lease period expiring
January of 2001 at an interest rate of 9.02% 56,494 37,440
Lease on factory equipment with lease period expiring
April of 2003 at an interest rate of 8.5% 83,542 --
Lease on factory equipment with lease period expiring
April of 2003 at an interest rate of 9.3% 118,782 --
----------- -----------
Total $ 1,697,371 $ 1,578,144
Less Current Portion (390,239) (323,876)
----------- -----------
Long Term Obligation Under Capital Leases $ 1,307,132 $ 1,254,268
----------- -----------
</TABLE>
7
<PAGE>
WINLAND ELECTRONICS, INC.
NOTES TO THE INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE E - SHORT TERM BORROWING
Short term borrowing consists of the following at September 30, 1998 and
December 31, 1997 balance sheet:
September 30, December 31,
Norwest Bank - Revolving Credit Line 1998 1997
---------- ----------
Balance $2,454,227 $1,733,227
Stated Interest Rate per Annum 8.75%* 9.0%*
Maximum Amount Outstanding During the Quarter $2,454,227 $2,050,227
Average Amount Outstanding During the Quarter $2,410,894 $1,842,073
Unused Credit Available $1,045,773 $1,400,121
* The stated interest rate per annum is an adjustable rate based on the current
leverage ratio, and was equal to 1/4 of a percent over prime rate at September
30, 1998. The interest on the revolving loan was $64,171 and $184,714 for the
three and nine months ended September 30, 1998. Additional interest was reported
related to the leased capital equipment and other term borrowing. The interest
expense on leased equipment was $40,653 and $122,613 for the three and nine
months ended September 30, 1998. Interest expense on other long term borrowing
was $34,316 and $99,733 for the three and nine months ended September 30, 1998.
NOTE F - RECLASSIFICATION OF INTEREST EXPENSE
Interest expense for the three and nine months ended September 30, 1997
amounting to $57,459 and $162,094 were previously included in the cost of goods
sold and operating expenses have been reclassified to interest expense to be
consistent with the 1998 presentation.
NOTE G - STOCK OPTIONS AND WARRANTS
As of September 30, 1998, options to purchase an aggregate of 266,900 shares of
the Company's common stock were granted and outstanding under the Company's 1989
Stock Option Plan (the "1989 Plan"). As of September 30, 1998, options to
purchase 183,050 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 90,000 shares were granted and
outstanding under the 1997 Stock Option Plan (the "1997 Plan") as of September
30, 1998, of which 18,000 shares were exercisable. The exercise price of options
under the 1997 Plan ranges from $2.375 to $3.125.
As of September 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 nine months ended September 30, 1998 v.
Three and nine months ended September 30, 1997
Net Sales:
The Company recorded net sales of $4,117,831 for the three months ended
September 30, 1998, an increase of 44% from $2,854,539 for the same period in
1997. Net sales of $12,810,906 were recorded for the first nine months of 1998,
compared to $8,660,164 for the same period in 1997, a 48% increase. The increase
in sales for the third quarter and first nine months of 1998 compared to 1997 is
attributed to increases in sales to several OEM customers, with sales to Select
Comfort representing the largest increase for the first nine months of 1998 over
1997 revenues. Sales of the Company's security products experienced moderate
increases for the first nine months of 1998 over 1997. 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 $7
million, to be fulfilled in 1998 and early 1999. In addition, the Company has a
$5.5 million manufacturing agreement with PeopleNet Communications, Inc. to be
fulfilled in 1998 and 1999. The Company also has a $2 million, three-year,
manufacturing agreement with CIC Systems (NZ), Inc. In addition, the Company has
purchase orders in excess of $286,000 with Rimage Corporation, an Eden Prairie,
Minnesota based manufacturer of computer equipment, to be fulfilled in 1998 and
early 1999.
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 $878,902 or 21.3% of net sales for the three months ended
September 30, 1998, compared to $660,131 or 23.1% of net sales for the same
period in 1997. For the first nine months of 1998 the gross profit was
$2,755,530 or 21.5% of net sales, compared to $1,986,654 or 22.9% of net sales
for the same period in 1997. The slight decline in gross profits, as a
percentage net of sales, for the third quarter and first nine months of 1998
were due in part to the sales mix during these periods. In addition to sales
mix, the increased costs associated with the automated equipment and increased
indirect costs needed to support the sales levels have had an effect on the
gross profits for both periods of 1998, compared to 1997.
Operating Expenses:
General and administrative expense was $299,462 or 7.3% of net sales for the
three months ended September 30, 1998, compared to $197,909 or 6.9% of net sales
for the same period in 1997. General and administrative expenses for the first
nine months of 1998 were $942,552 or 7.4% of net sales, compared to $730,825 or
8.4% of net sales for the same period in 1997. As a percentage of sales, general
and administrative expense increased slightly for the third quarter and declined
slightly for the first nine months of 1998. The actual general and
administrative expenses increased for both the third quarter and first nine
months of 1998, compared to 1997.
Marketing and customer relations expense was $69,651 or 1.7% of net sales for
the three months ended September 30, 1998, compared to $59,798 or 2.1% of net
sales for the same period in 1997. Marketing and customer relations expense for
the first nine months of 1998 was $207,009 or 1.6% of net sales, compared to
$184,720 or 2.1% of net sales for the same period in 1997. As a percentage of
sales, marketing and customer relations expense declined for both the third
quarter and first nine 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 $179,264 or 4.4% of net sales for the third
quarter of 1998, compared to $113,852 or 4.0% for the same period in 1997. For
the first nine months of 1998, research and development expense was $529,063 or
4.1% of net sales, compared to $322,067 or 3.7% 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 nine 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 $139,140 or 3.4% of
net sales for the three months ended September 30, 1998, compared to $112,897 or
4.0% of net sales for the same period in 1997. Interest expense for the first
nine months of 1998 was $407,060 or 3.2% of net sales, compared to $324,051 or
3.7% 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 $155,900 or $0.054 per diluted share for the
three months ended September 30, 1998, compared to net income of $175,366 or
$0.061 per diluted share for the same period in 1997. The Company reported net
income of $526,712 or $0.183 per diluted share for the nine months ended
September 30, 1998 compared to net income of $175,366 or $0.061 per diluted
share for the same period in 1997. Net income before taxes rose 36% to $239,846
for the third quarter 1998 from $175,366 for the same period in 1997. Year to
date net income before taxes rose 99% to $810,326 from $407,104 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 declined 12.5% for the third quarter of 1998 and rose 37.5% for the
first nine 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 September 30, 1998 was 1.41 to 1, compared to 1.47 to 1 on
December 31, 1997. Working capital on September 30, 1998 was $2,035,777 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 nine 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. The Company receives monthly interest 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 1/4% over the prime interest rate at September 30, 1998. At September 30,
1998, the principal outstanding balance on the revolving line of credit was
$2,454,227. 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.
Subsequent to the close of the third quarter 1998, the Company negotiated an
amended revolving credit agreement which fixes the interest rate at the prime
rate.
10
<PAGE>
Year 2000
Year 2000 Background
The Company's overall goal is to be Year 2000 ready. To accomplish this goal,
the Company is addressing the issue with respect to both its information
technology (IT) and non-IT systems, as well as its business relationships with
key third parties. To be ready, the Company needs to evaluate the Year 2000
issues and fix any problems it can so that all of its systems and relationships
will be suitable for continued use into and beyond the Year 2000.
The Company began addressing the Year 2000 issue in 1996 using a multi-step
approach, including inventory and assessment, remediation and testing, and
contingency planning. The Company began by assessing its internal computer
systems, including their components and machinery, that were susceptible to
system failure or processing errors as a result of the Y2K issue. This phase is
substantially complete. The Company's Year 2000 efforts have also included
assessment of "embedded" systems (such as automated systems and telephone
systems). In1998, the Company hired an outside consultant to assist it in the
assessment and remediation phases of handling the Year 2000 issue.
As part of the assessment phase, the Company has also recently initiated plans
for formal communications with certain key third parties, including suppliers,
distributors, and customers in order to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issues. The Company believes this part of the assessment phase will
continue throughout 1999 and cannot predict the outcome of other companies'
remediation efforts.
Year 2000 Costs
The Company plans to continue to work on its Year 2000 compliance efforts
throughout 1999. To date, the Company has spent only a minimal amount during the
assessment phase. Because the Company is still conducting the assessment phase
of its 2000 analysis, it cannot yet predict the total remaining cost of its
assessment, remediation and testing phases. As the Company continues its
analysis, it will monitor such costs. The cost will depend on the availability
of certain resources, third parties' Year 2000 readiness and other unpredictable
factors.
Risk Assessment
At this time, the Company believes that its most reasonably likely worst case
scenario is that the Company and/or its key customers could experience minor
disruptions. In the event that such disruptions do occur, the Company does not
expect that it would have a material adverse effect on the Company's financial
condition and results of operations. Due to the complex issues surrounding Year
2000 and other significant business issues; however, it is difficult to predict
outcomes and resulting consequences that could have a material adverse impact on
the company's results of operations, financial condition and cash flows.
Contingency Plans
The Company is preparing contingency plans so that the Company's critical
business processes can be expected to continue to function on January 1, 2000
and beyond. The Company's contingency plans will be structured to address both
remediation of systems and their components and overall business operating
risks. These plans are intended to mitigate both internal risks as well as
potential risks in the supply chain of the Company's suppliers and customers.
11
<PAGE>
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. If any major customer should for any reason stop doing business with
the Company, the Company's business would be significantly adversely affected.
Some of 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, in part,
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, in part, 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.
12
<PAGE>
PART II-OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company, through its insurance carrier, recently settled a products
liability lawsuit in Arizona state court in which the Company was one of
numerous defendant companies. The plaintiff, Debmar, Inc. and its insurance
carrier, had sought damages allegedly occurred when the plaintiff's vaccine was
allegedly destroyed by a defective refrigeration system that had been
manufactured by, purchased from, and installed by various companies. The case
was commenced in 1997 and has now been settled. The Company's contribution
toward the settlement was nonmaterial and paid entirely by its insurance
carrier. The Company previously reported this proceeding in its Form 10-KSB for
the year ended December 31, 1997 and Forms 10-QSB for the quarters ended March
31, 1998 and June 30, 1998.
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) No reports on Form 8-K were filed during the quarter ended September
30, 1998.
13
<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: November 13, 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)
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