SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997 Commission File No.: 0-18393
WINLAND ELECTRONICS, INC.
(Name of small business issuer in its charter)
Minnesota 41-0992135
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1950 Excel Drive, Mankato, Minnesota 56001
(Address of principal executive offices)
(507) 625-7231
(Issuer's telephone number)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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Check whether the Issuer (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 Issuer was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes X No_______
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for fiscal year ended December 31, 1997: $12,382,878
The aggregate market value of the Common Stock held by non-affiliates as of
March 12, 1998 was approximately $4,315,655 based on the closing sale price of
the Issuer's Common Stock on such date.
There were 2,833,039 shares of Common Stock, $.01 par value, outstanding as of
March 12, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference pursuant to Rule 12b-23: Portions of the
Company's Proxy Statement for its 1998 Annual Meeting are incorporated by
reference into Items 9, 10 and 11 of Part III.
Transitional Small Business Disclosure Format (check one) Yes No X
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Winland Electronics, Inc. (the "Company") was incorporated as a Minnesota
corporation in October 1972. Before 1985, the Company derived most of its
revenues from the sale of security devices to farms and businesses. These
security devices monitor and detect temperature, power failure, water leakage
and other environmental emergencies. In 1984, in an effort to diversify its
business, the Company began to design and manufacture custom controls and
assemblies for OEM customers. Throughout 1997, the Company continued to position
itself as a leading full service provider of custom electronic controls and
assemblies. The design and manufacturing of custom controls and assemblies for
OEM customers provided over 80% of the Company's total revenue in 1997. The
Company now provides controls and assemblies to several OEM customers who market
their products to a wide variety of industries. The Company continues to
maintain its presence in the security and industrial markets with the sales of
its own line of proprietary products.
PRODUCTS
The Company currently designs, produces and distributes products in two product
categories defined as "Electronic Controls and Assemblies for OEM Customers" and
"Security/Industrial Products."
Electronic Controls and Assemblies for OEM Customers. The Company designs and
manufactures custom electronic controls and assemblies for several OEM
customers. The Company responds to OEM customer needs by providing a mix of
value added services that go well beyond traditional contract manufacturing. The
services provided include product design, value engineering, manufacturing
engineering, testing, out-of-warranty repair, shipping and warehousing. These
services help to differentiate the Company from the competition and help
increase customer satisfaction, confidence and loyalty. A partial listing of the
several current OEM customers includes companies such as Select Comfort
Corporation, Johnson Worldwide Associates, CIC Systems, Inc., Scotsman
Industries, Inc. and PeopleNet Communications Corporation. The Company has in
place several firm purchase agreements with OEM customers which are scheduled to
be fulfilled in 1998 and subsequent years. There is no assurance that the
Company will continue to be engaged by any of these customers. Sales to OEM
customers accounted for 85% and 73% of the Company's total sales during 1997 and
1996, respectively.
Proprietary Security/Industrial Products. The Company is a supplier of simple
and sophisticated microprocessor and mechanically controlled sensors and alarms.
These products monitor and detect environmental changes, such as changes in
temperature or humidity, water leakage and power failures. The Companies "ALERT"
series of products may be hooked up to many burglar or fire alarm panels to
monitor and report unfavorable environmental conditions. Security/industrial
product sales accounted for 15% and 26% of the Company's total sales for 1997
and 1996, respectively.
<PAGE>
MARKETING AND DISTRIBUTION
The Company markets its design and manufacturing services to prospective OEM
customers primarily through in-house sales and marketing efforts, referrals from
existing customers and suppliers and leads generated by outside manufacturers'
representatives. One of the Company's key marketing objectives is to form long
range business relationships with OEM customers by working to develop a degree
of technological interdependence between itself and the customer. With this in
mind, the Company has worked to profile and seek out new OEM customers that need
a more complete solution to their manufacturing needs. The Company plans to
achieve continued growth in OEM sales by staying focused on what it does best,
responding to customer needs with exceptional service, technical expertise and
continuing to deliver quality cost effective controls and assemblies to its OEM
customers.
The Company markets its proprietary security/industrial products through dealers
and wholesalers, in-house direct marketing and sales efforts, instrumentation
catalogs and national and regional trade expositions. Currently, the Company
sells these products through a distribution network of over 350 locations in the
United States, Canada, Mexico and Europe.
SOURCE OF MATERIALS
Raw material components and some subassemblies are purchased from outside
vendors, and they are qualified through inspection before being incorporated
into the Company's products. Certain purchased components and subassemblies are
manufactured to design specifications furnished by the Company, while others are
standard off-the-shelf items. The Company utilizes multiple sources for the
off-the-shelf components, but generally maintains only one source for the items
manufactured to design specifications. Nevertheless, if the Company were to lose
one or more of its major components suppliers, some delay and possible
additional costs may be incurred while obtaining alternative sources.
In addition to manufacturing its own products, the Company has contracted with
companies in the United States and foreign countries to provide both finished
goods assemblies and component assemblies designed to the Company's
specifications. Although alternative sources for such items may be found, if the
Company were to lose one or more of these suppliers, some delay, and additional
costs may be incurred while obtaining alternative sources.
PATENTS, TRADEMARKS AND LICENSES
The Company holds federal trademark registrations for marks used in the
Company's business as follows: WATERBUG(R), TEMP ALERT(R) and ENVIRONMENTAL
SECURITY(R).
<PAGE>
SEASONALITY AND WORKING CAPITAL
Due to the diversity of the Company's customer mix, seasonality is no longer a
contributing factor in the need for working capital in any one quarter or
season. Changes in the types of products produced for the OEM Customer portion
of the Company's business could materially affect the seasonality of the
Company's business in subsequent years.
SIGNIFICANT CUSTOMERS
The Company has worked to develop long-term relationships with its OEM customers
that are mutually beneficial. Due to the nature of this segment of the business,
there is a significant degree of dependence between these customers and the
Company. Total sales to customers whose individual sales equaled or exceeded 10%
of the Company's sales revenues for the year ended December 31, 1997 and 1996
were $8,630,727 or 69.1% and $4,751,478 or 56.8%, respectively.
Select Comfort Corporation has been one of the Company's most significant
customers during both 1997 and 1996, with sales of 51% and 26% of the Company's
total sales, respectively. Select Comfort is a Plymouth, Minnesota based
air-sleep system manufacturer in the bedding industry. The Company has $15.2
million of purchase agreements with Select Comfort Corporation. At December 31,
1997, these agreements were just over half completed. The design and
manufacturing services provided to Johnson Worldwide Associate accounted for 17%
and 31% of the Company's total sales during 1997 and 1996, respectively. Johnson
Worldwide Associates is a Racine, Wisconsin based manufacturer of recreational
products.
In addition to the above mentioned contract with Select Comfort Corporation, the
Company has several other manufacturing agreements with other OEM customers. The
Company has a $5.5 million manufacturing agreement with PeopleNet Communications
Corporation of Chaska, Minnesota, to manufacture the "Intouch System" which is a
locating and mobile communications system for the long-haul trucking industry.
The Company began production of the "Intouch System" in late 1997. The Company
was also awarded a three year $2 million manufacturing agreement with CIC
Systems (NZ), Inc., a company based in New Zealand. The loss of any OEM customer
could have an adverse effect on the Company's short-term results.
BACKLOG AND GOVERNMENT CONTRACTS
The Company had no significant backlog of orders at fiscal year end. The Company
had no government contracts.
COMPETITION
The Company's business includes the design and manufacturing of electronic
controls and assemblies for OEM customers and the development and marketing of
proprietary security/industrial products. Among the security/industrial
products, competition has increased in the last two years as additional
companies have introduced competing products. The Company believes, however,
that its products offer desirable features at competitive prices.
<PAGE>
The competition for the contract design and manufacturing services offered by
the Company has increased substantially, both domestically and internationally.
To enhance its ability to compete effectively, the Company has continued to
invest in the development of its workforce and technologically advanced capital
equipment. The Company has been working to position itself as a full service
solution to its contract design and manufacture customers.
RESEARCH AND DEVELOPMENT
Throughout 1997, the Company has continued to position itself as a better
solution to its OEM customers by offering a complete solution to their design
and manufacturing needs. The Company has a strong research and development
department that has the ability to service most of the customers' engineering
requirements, including complete new product design, value engineering and
redesign of existing products. The Company has continued to expand its
engineering staff and equipment with advances in wireless radio frequency
design, expansion of its software development and advanced test system design
staff.
EFFECT ON ENVIRONMENTAL REGULATIONS
To the extent that the Company's management can determine, there are no federal,
state or local provisions regulating the discharge of materials into the
environment or otherwise relating to the protection of the environment with
which compliance by the Company has had, or is expected to have, a material
effect upon the capital expenditures, earnings or competitive position of the
Company.
FOREIGN OPERATIONS AND EXPORT SALES
The Company has not received any significant revenues from sales outside of the
United States during the last three fiscal years.
PERSONNEL
At December 31, 1997, the Company employed 89 employees (87 full-time and two
part-time employees), including six officers, one sales manager, two customer
service employees, one administrative assistant, 48 full-time and one part-time
manufacturing employees, including technicians and supervisors, three full-time
and one part-time materials management employees, four accounting employees,
four purchasing employees, thirteen research and development employees, three
quality assurance employees and two management information systems employees.
The Company also extensively uses temporary labor services for peak production
purposes. The Company is not subject to a collective bargaining agreement, and
it considers its relations with its employees to be good.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns its office and manufacturing facility located in Mankato,
Minnesota. The 53,000 square foot building consists of 10,500 square feet of
office space, 32,500 square feet of manufacturing space and 10,000 square feet
of warehouse space, all of which is used by the Company. The funding of this
facility, site and site improvements was acquired through a $1,700,000 building
loan from the city of Mankato, a $500,000 state small cities loan, also payable
to the city of Mankato, and $270,000 from the city of Mankato in the form of tax
increment financing. The mortgage is payable in equal monthly installments of
$16,200 for both loans until January 1, 2000, at which time it may be necessary
for the Company to renew the financing of the building. As of December 31, 1997,
the outstanding principle balance was $2,022,023. Management believes the
Company's facility adequately supports the Company's present and near future
operations. Management believes its property is adequately covered by insurance.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders of the Company
during the fourth quarter of 1997.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap Market
under the symbol WLET. The following table sets forth the high and low bid
quotations, as reported by the Nasdaq SmallCap Market. The bid quotations
represent interdealer prices and do not include retail mark-ups, mark-downs or
commissions and may not necessarily represent actual transactions.
Fiscal Year Ended
December 31, 1997 Low High
First Quarter 2 1/4 4 1/4
Second Quarter 2 1/2 3 1/2
Third Quarter 1 25/32 3 1/8
Fourth Quarter 2 3 1/8
Fiscal Year Ended
December 31, 1996 Low High
First Quarter 2 1/8 2 7/8
Second Quarter 2 1/8 2 5/8
Third Quarter 2 2 7/8
Fourth Quarter 2 1/8 4 1/2
On March 12, 1998, the fair market value of the Company's Common Stock
was $2.50, based on the closing sale price on at that date. As of December 31,
1997, the Company had approximately 499 shareholders of record.
The Company has never paid cash dividends on its Common Stock. The
Board of Directors presently intends to retain earnings for use in the Company's
business and does not anticipate paying cash dividends on Common Stock in the
foreseeable future. Any future determinations as to the payment of dividends
will depend on the financial condition of the Company and such other factors as
are deemed relevant by the Board of Directors.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations - 1997 vs. 1996
Net Sales. Net sales increased 48.1% to $12,383,878 for the year ended
December 31, 1997, compared to $8,361,226 for 1996. The growth in net sales is
primarily attributed to sales to Select Comfort Corporation during 1997. The
Company currently has purchase orders with Select Comfort Corporation to ship
approximately $9.3 million of products during 1998. At December 31, 1997, the
Company also had a $5.5 million manufacturing agreement with PeopleNet
Communications Corporation of Chaska, Minnesota. Although the Company began
production in relation to this agreement in late 1997, it had not recorded any
significant revenues before December 31, 1997. In October of 1997, the Company
announced that it had been awarded a $250,000 purchase order from Keyless Door
Lock Company for the manufacture of a residential key less entry system.
Subsequently, this purchase order was increased and at December 31, 1997 was in
excess of $325,000. In addition, in December of 1997 the Company was awarded a
three year $2 million 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 $2,640,610 or 21.3% of net sales for
the year ended December 31, 1997, compared to $1,831,680 or 21.9% of net sales
for 1996. The gross profit, as a percentage of net sales, decreased slightly for
1997 over 1996, due primarily to changes in sales mix during the year.
Operating Expenses. General and administrative expense was $1,186,043
or 9.6% of net sales for the year ended December 31, 1997, compared to $901,356
or 10.8% of net sales for 1996. The general and administrative expense declined
as a percentage of sales for 1997 compared to 1996. The decline is primarily
attributed to general and administrative expenses increasing at a slower rate
than the sales.
Marketing and customer relations expense was $245,708 or 2.0% of net
sales for the year ended December 31, 1997, compared to $196,147 or 2.3% of net
sales for 1996. Marketing and customer relations expense as a percentage of
sales declined for 1997 compared to 1996. The increase in the dollars spent on
marketing and customer relations expense was primarily due to an increased
emphasis on the Company's design and manufacture of custom controls and
assemblies, which are sold primarily to the Company's OEM customers. The Company
also continues to actively market its security/industrial products.
Research and development expense was $471,357 or 3.8% of net sales for
the year ended December 31, 1997, compared to $322,488 or 3.9% of net sales for
1996. As a percentage of sales the research and development expense declined
slightly. The Company has continued expanding its engineering capabilities
throughout 1997, with the addition of technical staff and the acquisition of
additional test and development equipment.
Interest Expense. Interest expense, including interest on the Company's
revolving line of credit, other long and short-term notes and interest on
capital lease obligations was $445,158 or 3.6% of net sales for the year ended
December 31, 1997, compared to $341,693 or 4.1% of net sales for 1996. As a
percentage of net sales interest expense declined for 1997 compared to 1996. The
actual expense for the year increased, due primarily to additional short-term
borrowing and borrowing through capital lease agreements on equipment needed to
support the increase sales. The additions of capital equipment should have a
positive effect on quality and efficiencies in subsequent periods.
<PAGE>
Net Income. The Company reported net income of $566,687 or $0.20 per
share for 1997, compared to net income of $264,147 or $0.10 per share for 1996.
The Company's increased profitability was the result of increased sales,
combined with careful budgeting and cost control.
The Company believes inflation has not significantly affected its
results of operations.
The Company is evaluating the effect that reaching the year 2000 will
have on its software programs and general business operations and does not
believe that this issue will materially impact the Company's financial results.
Results of Operations - 1996 vs. 1995
Net Sales. Net sales increased 43.0% to $8,361,226 for the year ended
December 31, 1996 compared to $5,850,724 during the year ended December 31,
1995. The sales growth during 1996 primarily reflects escalating shipments to
OEM customers under several large purchase orders. In addition to the Company's
growth in OEM sales during 1996, it experienced further growth in its
proprietary line of security/industrial products.
The Company believes that, for the foreseeable future, sales derived
from contract design and manufacturing services will grow at a faster rate than
sales from security/industrial products. Throughout 1996, management has
continued to direct considerable attention and resources toward expanding
existing customer relationships and securing new, long-term contract design and
manufacturing customer relationships. The Company's ability to increase sales
from contract design and manufacturing services or security/industrial products,
or both, is subject to numerous risks, including without limitation (i) the
Company's dependence on a small number of key customers, the loss of any of
which could adversely affect sales; (ii) a decrease in, or lack of, market
demand for the products being manufactured by the Company; and (iii) competition
from low cost manufacturers located in the United States and abroad.
Gross Profit. Gross profit increased to 21.9% of net sales or
$1,831,680 for the year ended December 31, 1996, compared to 18.1% of net sales
or $1,059,524 for 1995. The increase in gross profit during 1996 primarily
reflects better manufacturing efficiencies, improved training, measurement and
quality systems and benefits derived from capital equipment acquisitions.
Operating Expenses. General and administrative expense increased from
$726,333 or 12.4% of net sales in 1995 to $901,356 or 10.8% of net sales, during
the year ended December 31, 1996. The increase in general and administrative
expense during 1996 was required to support the higher level of sales.
Marketing expense was $196,147 or 2.3% of net sales for the year ended
December 31, 1996, compared to $202,528 or 3.5% of net sales in 1995. The
nominal decrease in marketing expenditures during 1996 is primarily the result
of a more pronounced increase in product mix dominance by OEM sales over sales
of proprietary security/industrial products in 1996 than in previous years.
<PAGE>
The Company has continued to emphasize the marketing of its
security/industrial products, while actively pursuing new, and maintaining
existing, contract design and manufacture relationships. In the future, the
marketing expenditures, as a percentage of net sales, are expected to
approximate historical levels.
Research and development expense was $322,488 or 3.9% of net sales
during the year ended December 31, 1996, compared to $209,918 or 3.6% of net
sales during 1995. The increase in research and development expense is
attributed to increased technical staffing and the purchase of technically
advanced test and development equipment. Both the addition of staff and the
acquisition of research and development equipment are intended to further assist
in the development of new products and the enhancement of existing products.
This equipment will enable the Company to continue to provide full technical and
development services to its customers.
The research and development group has worked closely with other
departments of the Company to help identify and secure new contract design and
manufacturing projects and customer relationships.
Interest Expense. Total interest expense, including interest related to
the building and capital lease obligations, was $341,693 for the year ended
December 31, 1996, compared to $248,212 for the year ended December 31, 1995.
The increase in interest expense was due to increased short-term borrowing
needed to support increased sales and interest related to additional obligations
under capital lease agreements.
Net Income. The Company reported net income of $264,147 or $0.10 per
share for 1996, compared to a net loss of $149,907 or $0.06 per share for 1995.
The Company's return to profitability was primarily the result of increased
sales, combined with higher gross profit margins and an increase in operating
expenses that was less than the Company's increase in sales.
The Company believes inflation has not significantly affected its
results of operations.
Liquidity and Capital Resources
The current ratio on December 31, 1997 was 1.47 to 1, compared to 1.56
to 1 on December 31, 1996. Working capital was $1,759,592 on December 31, 1997
compared to $1,567,234 on December 31, 1996. The increase in working capital
primarily reflects increases in accounts receivable and inventory, offset in
part by increases in notes payable, accounts payable and current obligations
under capital leases needed to support the increased sales for the year.
<PAGE>
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 .5% over the prime rate. On September 18, 1997,
pursuant to the "Third Amendment" to the revolving credit agreement, the
interest rate was reduced from .75% over prime to .5% over prime. At December
31, 1997, there was an outstanding balance of $1,733,227 under the line of
credit. The principal outstanding under the line of credit is due May 31, 1998,
at which time the Company anticipates that it will renew its working capital
line of credit at terms which approximate its existing line. The Company's
management believes that the 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.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are at the pages set forth below:
Page
Independent Auditor's Report dated February 4, 1998............. 11
Balance Sheet as of December 31, 1997 and 1996 ................. 12
Statement of Income for Years Ended
December 31, 1997 and 1996...................................... 13
Statement of Changes in Stockholders' Equity for
Years Ended December 31, 1997 and 1996.......................... 14
Statement of Cash Flows for Years Ended
December 31, 1997 and 1996...................................... 15
Notes to Financial Statements................................... 16
<PAGE>
AHERN MONTAG & VOGLER, LTD.
Certified Public Accountants
227 East Main Street, Suite 110
P.O. Box 3745
Mankato, Minnesota 56002-3745
Telephone: (507) 625-8490 Fax: (507) 625-5391
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Winland Electronics, Inc.
Mankato, Minnesota 56001
We have audited the accompanying balance sheet of Winland Electronics, Inc. as
of December 31, 1997 and 1996, and the related statements of income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Winland Electronics, Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ Ahern Montag & Vogler, Ltd.
AHERN MONTAG & VOGLER, LTD.
Certified Public Accountants
February 4, 1998
<PAGE>
WINLAND ELECTRONICS, INC.
BALANCE SHEET
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
Current
Cash $ 23,542 $ 19,499
Accounts Receivable, Net 1,581,368 1,327,386
Inventory 3,753,342 2,969,677
Prepaid Expenses 109,314 63,633
----------- -----------
Total Current Assets 5,467,566 4,380,195
NET PROPERTY AND EQUIPMENT 3,141,279 3,128,588
NET PROPERTY UNDER CAPITAL LEASES 1,715,500 721,066
NET PATENTS AND TRADEMARKS 7,034 8,564
DEFERRED INCOME TAXES 17,741 52,535
----------- -----------
TOTAL ASSETS $10,349,120 $ 8,290,948
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current
Notes Payable $ 1,733,227 $ 1,580,227
Accounts Payable 1,200,177 683,406
Wages Payable 61,150 41,815
Payroll Taxes Payable 24,690 34,891
Other Accruals 162,709 120,382
Income Taxes Payable 4,414 336
Deferred Revenue 27,001 27,001
Obligations Under Capital Leases 323,876 163,636
Current Maturities 170,730 161,267
----------- -----------
Total Current Liabilities 3,707,974 2,812,961
----------- -----------
Long-Term
Deferred Revenue, Less Current Portion 189,006 216,007
Obligations Under Capital Leases, Less
Current Obligations 1,254,268 492,120
Long-Term Debt, Less Current Maturities 2,289,193 2,459,644
----------- -----------
Total Long-Term Liabilities 3,732,467 3,167,771
----------- -----------
Total Liabilities 7,440,441 5,980,732
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock, Par Value $.01 Per Share,
20,000,000 Shares Authorized, 2,808,039
and 2,751,071 Shares Issued and
Outstanding 28,080 27,511
Additional Paid-in Capital 2,079,001 2,047,794
Retained Earnings 801,598 234,911
----------- -----------
Total Stockholders' Equity 2,908,679 2,310,216
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $10,349,120 $ 8,290,948
=========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
------ ------
SALES $ 12,382,878 $ 8,361,226
COST OF SALES (9,742,268) (6,529,546)
------------ ------------
GROSS PROFIT 2,640,610 1,831,680
------------ ------------
OPERATING EXPENSES
General and Administrative 1,186,043 901,356
Marketing 245,708 196,147
Research and Development 471,357 322,488
------------ ------------
Total Operating Expenses 1,903,108 1,419,991
------------ ------------
OPERATING INCOME 737,502 411,689
------------ ------------
OTHER INCOME AND (EXPENSES)
Interest Income 53,028 31,237
Tax Increment Financing Income 27,001 27,001
Miscellaneous Income 3,958 15,428
Interest Expense (214,198) (158,183)
Sale of Assets (110) (153)
------------ ------------
Total Other Income and (Expenses) (130,321) (84,670)
------------ ------------
INCOME BEFORE INCOME TAXES 607,181 327,019
INCOME TAXES 40,494 62,872
------------ ------------
NET INCOME $ 566,687 $ 264,147
============ ============
EARNINGS PER SHARE DATA
Basic Earnings Per Share $ 0.20 $ 0.10
============ ============
Weighted Average Common Shares Outstanding 2,796,458 2,616,174
============ ============
Diluted Earnings Per Share $ 0.20 $ 0.10
============ ============
Weighted Average Common Shares Outstanding
Including Potentially Dilutive Shares 2,875,977 2,729,968
============ ============
The Accompanying Notes are an Integral Part
of the Financial Statements
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
ADDITIONAL (DEFICIT)
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
-------- -------- --------
BALANCES ON 1-1-96 $ 25,833 $1,917,094 ($ 29,236)
Common Stock
Issued Under Stock Option Plan
167,760 Shares Ranging from
$.06 to $.25 Per Share 1,678 15,629
Income Tax Benefit from Exercise
of Nonqualified Stock Options 115,071
Net Income 264,147
---------- ---------- ----------
BALANCES ON 12-31-96 27,511 2,047,794 234,911
Common Stock
Issued Under Stock Option Plan
45,940 Shares Ranging from
$.06 to $1.00 Per Share 459 4,432
Common Stock
Issued Under Employee Stock
Purchase Plan 11,028 Shares
Ranging from $2.13 to $2.44
Per Share 110 25,489
Income Tax Benefit from Exercise
of Nonqualified Stock Options 1,286
Net Income 566,687
---------- ---------- ----------
BALANCES ON 12-31-97 $ 28,080 $2,079,001 $ 801,598
========== ========== ==========
The Accompanying Notes are an Integral Part
of the Financial Statements
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Cash Received from Customers $ 12,128,896 $ 8,036,058
Other Miscellaneous Operating Receipts 56,986 46,665
Cash Paid to Suppliers and Employees (11,247,097) (8,138,233)
Interest Paid (434,841) (357,884)
Income Taxes Paid (672)
------------ ------------
Net Cash Provided (Used) by
Operating Activities 503,272 (413,394)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases Of Property and Equipment (262,625) (432,070)
Equipment Sale Proceeds 11,665
------------ ------------
Net Cash (Used) by Investing Activities (250,960) (432,070)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Advances on Credit Line 153,000 504,775
Proceeds from Debt 557,397
Payments on Debt (160,988) (83,647)
Payments on Capital Lease Obligations (270,771) (133,708)
Sale of Common Stock 30,490 17,307
------------ ------------
Net Cash (Used) Provided by
Financing Activities (248,269) 862,124
------------ ------------
NET INCREASE IN CASH 4,043 16,660
CASH - BEGINNING OF YEAR 19,499 2,839
------------ ------------
CASH - END OF YEAR $ 23,542 $ 19,499
============ ============
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES
Net Income $ 566,687 $ 264,147
Adjustment to Reconcile Net Income to
Net Cash From Operating Activities
Depreciation & Amortization 438,414 276,418
Loss on Sale of Assets 110 153
Income Tax Benefit from Exercise
of Nonqualified Stock Options 1,286 115,071
Changes in Assets & Liabilities
(Increase) in Accounts Receivable (253,982) (332,155)
(Increase) in Inventory (783,665) (774,635)
(Increase) in Prepaid Expenses (45,681) (22,709)
Decrease (Increase) in Deferred Income Taxes 34,794 (52,535)
Increase in Accounts Payable 516,771 52,946
Increase in Wages Payable 19,335 16,193
(Decrease) Increase in Payroll Taxes Payable (10,201) 23,121
Increase in Other Accruals 42,327 47,256
Increase in Income Taxes Payable 4,078 336
(Decrease) in Deferred Revenue (27,001) (27,001)
------------ ------------
Net Cash Provided (Used) by
Operating Activities $ 503,272 ($ 413,394)
============ ============
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
Operating Characteristics - Winland Electronics, Inc. (referred to
herein as the "Company") was incorporated under Minnesota law on October
30, 1972. The Company is engaged in the design and manufacturing of
electronic control devices. The Company extends unsecured credit to its
customers in this industry.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect amounts and
disclosures reported in the financial statements. Actual results could
differ from such estimates and assumptions.
Accounts Receivable/Uncollectibles - The Company maintains an allowance
for doubtful accounts based on the aging of accounts receivable. The
balance of the allowance for doubtful accounts at December 31, 1997 and
1996 is $5,074 and $4,455, respectively.
Inventories - Inventories are stated at the lower of cost or market.
Cost of raw materials and purchased parts or subassemblies is determined
principally by the first-in, first-out method. Cost of finished goods is
determined principally by the standard cost method, which approximates
average costs.
Property and Depreciation - Property and equipment are carried at cost.
Maintenance and repairs are charged to operations and improvements are
capitalized. Items sold, retired, or otherwise disposed of are removed
from the asset and accumulated depreciation accounts and any gains or
losses thereon are reflected in operations.
Depreciation is computed using the straight-line method at rates based
on the estimated service lives of the various assets as follows:
Building 39 Years
Land Improvements 20 Years
Office Equipment 5-7 Years
Factory Equipment 5-7 Years
Computer & Teleph 3-7 Yearsent
Research & Development Equipment 5-7 Years
Display Equipment 5-7 Years
Property Under Capital Leases 4-7 Years
Intangibles - Costs of Patents and Trademarks are capitalized and
amortized over the estimated useful life of the related products,
approximately 20 years.
Income Taxes - The Company uses the asset and liability method as
identified in SFAS 109, Accounting for Income Taxes. Investment tax
credits are accounted for by the flow-through method of accounting.
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Stock-Based Compensation - The Company follows the intrinsic value based
method of accounting as prescribed by APB 25, Accounting for Stock
Issued to Employees, for its stock-based compensation. Under the
Company's stock option plan, the exercise price is equal to or greater
than the fair value of the options at the grant date and no compensation
cost is recognized.
Earnings Per Share - The Company has adopted Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings Per Share" (EPS) which
requires companies to present basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by dividing net
earnings by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing
net earnings by the weighted average number of common shares outstanding
during the period including potentially dilutive shares under the
treasury stock method. Earnings per share for the year ended December
31, 1996 has been restated to comply with SFAS No. 128.
2. INVENTORIES
Inventories are Comprised of:
1997 1996
Raw Materials $2,775,668 $1,695,764
Work in Progress 490,428 554,090
Finished Goods 479,900 709,860
Supplies 7,346 9,963
---------- ----------
Total $3,753,342 $2,969,677
========== ==========
3. PROPERTY AND EQUIPMENT
Property and Equipment consists of:
1997 1996
Land $192,640 $192,640
Land Improvements 77,369 77,369
Building 2,376,511 2,343,275
Office Equipment 167,528 341,658
Factory Equipment 562,026 549,567
Computer & Telephone Equipment 402,444
Research & Development Equipment 110,608 143,941
Display Equipment 18,152 31,413
---------- ----------
Total $3,907,278 $3,679,863
Accumulated Depreciation (765,999) (551,275)
---------- ----------
Net Property and Equipment $3,141,279 $3,128,588
========== ==========
Depreciation and amortization charged to expense for the years ended
December 31, 1997 and 1996 was $436,884 and $274,888, respectively.
These amounts include amortization of property under capital lease
assets.
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
4. LEASES
Leased Property under capital leases consists of the following:
1997 1996
Factory Equipment $1,982,281 $863,473
Office Equipment 60,408 95,754
Computer & Telephone Equipment 120,415
Research & Development Equipment 9,396 4,401
---------- --------
Total $2,172,500 $963,628
Accumulated Amortization (457,000) (242,562)
---------- --------
Net Leased Property Under
Capital Leases $1,715,500 $721,066
========== ========
Capital lease obligations are summarized as follows:
1997 1996
Lease on factory, office and R & D
equipment with lease period expiring
July, 1997, at interest of 8%. $ $ 6,195
Lease on factory and office equipment
with lease period expiring January,
2000 at interest of 9.5%. 157,905 239,648
Lease on factory equipment with
lease period expiring January, 2000
at interest of 10.37%. 9,178
Lease on factory equipment with
lease period expiring October, 2000
at interest of 8.95%. 27,908
Lease on factory equipment with
lease period expiring October, 1998
at interest of 9.23%. 11,496 25,641
Lease on office equipment with
lease period expiring March, 2000
at interest of 9%. 13,882 18,992
Lease on factory equipment with
lease period expiring August, 2001
at interest of 9.49%. 200,999 242,293
Lease on factory equipment with
lease period expiring July, 2001
at interest of 9.96%. 95,354 113,809
Lease on various equipment with
lease period expiring March, 2002
at interest of 9.94%. 56,005
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
1997 1996
4. LEASES - (Continued)
Lease on factory equipment with
lease period expiring March, 2002
at interest of 8.88%. 188,113
Lease on factory equipment with
lease period expiring February, 2000
at interest of 9.01%. 31,019
Lease on factory equipment with
lease period expiring June, 2002
at interest of 10.04%. 73,093
Lease on factory equipment with
lease period expiring May, 2002
at interest of 10.04%. 58,564
Lease on factory equipment with
lease period expiring January, 2001
at interest of 9.02%. 37,440
Lease on factory equipment with
lease period expiring November, 2004
at interest of 8.97%. 607,456
Lease on factory equipment with
lease period expiring October, 2002
at interest of 9.50%. 18,910
---------- --------
Total $1,578,144 $655,756
Less: Current Portion (323,876) (163,636)
---------- --------
Obligation under capital leases,
less current portion $1,254,268 $492,120
========== ========
The Company leases equipment and vehicles under noncancellable operating
leases that expire from 1998 to 2000. The lessee is responsible for all
repairs and maintenance, insurance, and other related expenses in
connection with these leases.
Rental and other related expenses for the above leases for the years
ended December 31, 1997 and 1996 was $99,648 and $107,670, respectively.
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
4. LEASES - (Continued)
Minimum future annual lease payments under these leases as of December
31, 1997 are as follows:
Years Ended Capital Operating
December 31, Leases Leases
1998 $452,959 $ 60,774
1999 449,348 42,710
2000 328,909 16,149
2001 303,521
2002 179,243
Thereafter 269,403
---------- --------
Total Minimum Lease Payments $1,983,383 $119,633
Less Amounts ========
Representing Interest (405,239)
Present Value of Net ----------
Minimum Lease Payments $1,578,144
==========
5. INTANGIBLES
Costs related to patents and trademarks that pertain to the Company's
products have been capitalized to Patents and Trademarks.
Intangibles consist of:
1997 1996
Patents and Trademarks $ 34,240 $ 34,240
Accumulated Amortization (27,206) (25,676)
-------- --------
Net Patents and Trademarks $ 7,034 $ 8,564
======== ========
Amortization charged to expense for the years ended December 31, 1997
and 1996 was $1,530 and 1,530, respectively.
6. LINE OF CREDIT
The Company has a working capital line of credit in the maximum amount
of $3,500,000. Interest is calculated at .50% over prime and is due
monthly. Principal is due May 31, 1998, at which time the Company
anticipates it will renew its working capital line of credit at terms
which approximate its existing credit line. The line is secured by
inventory, equipment and accounts receivable and is subject to a defined
borrowing base equal to 80% of qualified accounts receivable and 60% of
inventories. In addition, other conditions including ratios and net
income levels must be met.
Pertinent credit line information is as follows:
1997 1996
Year End Balance $1,733,227 $1,580,227
Stated Interest Rate 9.0% 9.0%
Maximum Amount Outstanding $2,050,227 $1,995,227
Average Amount Outstanding $1,842,073 $1,626,398
Unused Credit Available $1,400,121 $1,204,081
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
7. LONG-TERM DEBT
The following is a summary of long-term debt:
1997 1996
Note payable under tax increment
financing arrangement in monthly
installments of $13,117 including
interest at 6.941% to January 1, 2000
when the remaining balance is payable.
Secured by property and equipment. $1,572,542 $1,615,278
Note payable under tax increment
financing arrangement in monthly
installments of $3,030 including
interest at 4% to January 1, 2000
when the remaining balance is payable.
Secured by property and equipment 449,481 465,997
Note payable in monthly installments
of $8,334 plus interest at .75% over
prime, 9.25% at December 31, 1997, to
October, 2001. Secured by accounts
receivable. 383,324 483,332
Note payable in monthly installments
of $595 including interest at 9.25%
to April, 2001 when the remaining
balance is payable. Secured by
equipment. 54,576 56,304
---------- ----------
Total $2,459,923 $2,620,911
Amount due in one year or less (170,730) (161,267)
---------- ----------
Total Long-Term Debt $2,289,193 $2,459,644
========== ==========
Maturities of long-term debt are as follows:
1998 $ 170,730
1999 175,273
2000 1,983,244
2001 130,676
----------
Total $2,459,923
==========
Interest expense for the years ended December 31, 1997 and 1996 was
$445,158 and $341,693, respectively. These amounts include interest paid
on capital lease obligations.
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
8. INCOME TAXES
Beginning in 1997, the Company accounts for depreciation different for
book and income tax purposes. The tax effects of temporary differences
that give rise to significant portions of deferred tax assets and
liabilities are as follows:
Deferred Tax 1997 1996
Unused NOL Carryforwa $ 38,154 $223,388
Unused R & D Credit 57,472 37,140
Unused ITC Credit 12,971 12,971
Unused Jobs Credit 14,540 14,540
Unused AMT Credit 7,163 5,252
Inventory 46,061 45,502
Allowance for Doubtful Accounts 2,030 1,782
Compensated Absences Accrual 22,325 18,625
------- --------
Total Deferred Tax Assets $200,716 $359,200
Valuation Allowance (148,181) (306,665)
-------- --------
Deferred Tax Assets $ 52,535 $ 52,535
Deferred Tax Liabilities:
Property & Equipment 34,794
-------- --------
Net Deferred Tax Assets $ 17,741 $ 52,535
======== ========
Realization of deferred tax assets associated with the NOL and credit
carryforwards is dependent upon generating sufficient taxable income
prior to their expiration. Management believes that there is a risk
that certain of these NOL and credit carryforwards may expire unused
and, accordingly, has established a valuation allowance against them.
Although realization is not assured for the remaining deferred tax
assets, management believes it is more likely than not that they will
be realized through future taxable earnings or alternative tax
strategies.
Components of the provision for income taxes are as follows:
1997 1996
Current Taxes Payable $ 4,414 $ 336
Additional Paid-In Capital
from Benefit of Stock
Options Exercised 1,286 115,071
Deferred Tax Expense (Benefit) 34,794 (52,535)
------- -------
Provision for Income Taxes $40,494 $62,872
======= =======
During 1997 and 1996 the Company also received a tax benefit from the
carryforward of net operting losses totaling $193,106 and $26,941,
respectively.
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
8. INCOME TAXES - (Continued)
Statutory income tax rate reconciliation to effective rate:
1997 1996
Statutory U.S. Income Tax Rate 35.0% 35.0%
State Taxes, Net of Federal Tax Benefit 6.37% 6.37%
Tax Benefit of NOL and Credit
Carryforwards (33.70%) (21.04%)
Graduated Rates Differencs (1.0%) (1.1%)
------ ------
Effective Income Tax Rate 6.67% 19.23%
====== ======
Investment Tax Credits of $12,971 which were reduced 35% by the Tax
Reform Act of 1986 expire on December 31, 2000. Credits for increasing
research and development activities of $57,472 will expire on December
31, 2008 through 2012. Credits for alternative minimum tax of $7,163
and a $14,540 targeted jobs credit are available for future use. Net
operating losses expire as follows:
December 31 Federal Loss Expires
1995 $127,180 12-31-2010
========
9. STOCK-BASED COMPENSATION PLANS
The Company has a Stock Option Plan which reserves shares of common
stock for issuance to executives, key employees, directors and
consultants. Beginning in 1997, the Company also has an Employee Stock
Purchase Plan. The Company has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the stock option plans. Had compensation cost for the
Company's Stock Option Plan, Employee Stock Purchase Plan and warrants
been determined based on the fair value at the grant date for awards in
1997 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced
to the pro forma amounts indicated below:
1997 1996
---- ----
Net Earnings - as Reported $566,687 $264,147
Net Earnings - Pro Forma $484,950 $224,457
Earnings Per Share - as Reported $.20 $.10
Earnings Per Share - Pro Forma $.17 $.08
The assumption regarding the fixed options and warrants issued is that
compensation cost is recognized over the graded vesting period of the
options and warrants, which ranges from zero to five years. Fixed
options granted before 1995 were not considered in the calculation.
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
9. STOCK-BASED COMPENSATION PLANS - (Continued)
The fair value of each stock option grant and warrant issued is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants:
1997 1996
---- ----
Expected Lives (Years) 3.50 3.84
Dividend Yield .0% .0%
Expected Volatility 64% 67%
Risk-Free Interest Rate 5.5% 7.5%
The total number of shares of common stock that may be granted under
the Stock Option Plan is 300,000. The Plan also includes a provision to
grant non-employee directors the option to purchase 3,000 shares
annually of common stock. The plan provides that shares granted come
from the Company's authorized but unissued common stock. The price of
the options granted under the plan, unless otherwise determined by the
Administrator, generally will not be less than 100% of the fair market
value per share on the date of grant and may not be less than 85% of
the fair market value per share on the grant date. Options expire
within five to six years from the date of the grant. In addition, the
Company has issued common stock warrants outside of the Stock Option
Plan.
Effective January 1, 1997, the Company adopted an Employee Stock
Purchase Plan to provide substantially all employees an opportunity to
purchase shares of its common stock through payroll deductions, up to
15% of eligible compensation. The Plan is carried out in two annual 6
month phases beginning January 1 and July 1, the grant dates. On June
30 and December 31, the exercise dates, participant account balances
are used to purchase shares of stock at the lesser of 85% of the fair
value of shares on the grant date or the exercise date. The Employee
Stock Purchase Plan expires December 31, 2002. A total of 100,000
shares were originally available for purchase under the Plan. There
were 11,028 shares purchased under the Plan for the year ended December
31, 1997. Compensation expense is recognized for the fair value of the
employee's purchase rights, estimated using the Black-Scholes model,
with the following assumptions for the year ended December 31, 1997:
dividend yield of 0%, expected life of 6 months, expected volatility of
64% and risk-free interest rate of 5.5%.
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
9. STOCK-BASED COMPENSATION PLANS - (Continued)
Information regarding the Company's option plan is as follows:
1997 1996
---- ----
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------- --------- ------ ---------
Options Outstanding,
Beginning of Year 296,940 1.80 421,700 1.01
Options Exercised 45,940 .11 167,760 .10
Option ancelled 6,000 2.63
Options Granted 100,000 2.71 43,000 2.57
Options Outstanding,
End of Year 345,000 2.25 296,940 1.80
Option Price Range
at End of Year .06 to 3.64 .06 to 3.64
Option Price Range for
Exercised Shares .06 to 1.00 .06 to .25
Weighted Average Fair Value
of Options Granted During
the year $1.31 $1.44
The following table summarizes information about fixed-price stock
options and warrants outstanding at December 31, 1997:
Outstanding Remaining Number Exercisable
Exercise Prices 12-31-97 Contractual Life at 12-31-97
--------------- ----------- ---------------- ------------------
.06 to .125 37,000 1-2 years 34,600
.8125 18,000 2 years 14,400
1.8125 to 2.0625 37,000 2-3 years 24,500
2.375 to 2.69 169,400 2-5 years 50,400
2.75 to 3.25 54,600 3-5 years 33,000
3.30 to 3.64 29,000 3-4 years 12,250
-------------- ------- -------
.06 to 3.64 345,000 169,150
-------------- ------- -------
The Company also has 37,000 common stock warrants at $2.20 per share
which were issued in April, 1995 and are outstanding at December 31,
1997. All of these warrants were exercisable at December 31, 1997.
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
10. EARNINGS PER SHARE
The following is a reconciliation of the denominators of basic and
diluted EPS. For both basic and diluted EPS, the numerators are the
same as the net income reported in the financial statements.
Shares
(Denominator)
1997 1996
---- ----
Basic EPS 2,796,458 2,616,174
Effect of Dilutive
Securities:
Stock Options
and Warrants 79,519 113,794
--------- ---------
Diluted EPS 2,875,977 2,729,968
========= =========
Options to purchase 107,600 and 91,000 shares of common stock at
December 31, 1997 and 1996, respectively, were not included in the
computation of diluted EPS because the options' exercise prices were
greater than the average market price of common shares. All of the
options that were excluded in the 1997 calculation were still
outstanding at December 31, 1997. No transactions have occurred
subsequent to December 31, 1997 that would have materially changed the
number of potential common shares outstanding.
11. PENSION PLAN
The Company has adopted a qualified defined contribution 401K profit
sharing plan for its employees who meet certain age and service
requirements. Employees are allowed to contribute up to 15% of
eligible compensation and the employer, at management's discretion,
makes a contribution of one-third of the employees' contributions up
to a maximum of 9% for the employees, a maximum of 3% for the
employer. The Company contributed $44,457 and $35,585 to the Plan for
the years ended December 31, 1997 and 1996, respectively.
12. CUSTOMER DEPENDENCE
The Company is dependent on certain customers for a significant
portion of its total sales. Sales to customers whose individual sales
equaled or exceeded 10% of the Company's total sales consisted of two
customers totaling $8,630,727 and two customers totaling $4,751,478
for the years ended December 31, 1997 and 1996, respectively.
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
13. TAX INCREMENT FINANCING
The Company and the City of Mankato have entered into a tax increment
financing agreement. Per the agreement, the City has financed the
construction of the Company's new building. In addition, the City has
donated land and land improvements at a fair market value of $270,009
to the Company. The Company will recognize the $270,009 of deferred
revenue over the 10 year life of the tax increment finance district.
14. NON-CASH TRANSACTIONS
During the years ended December 31, 1997 and 1996, the Company acquired
$1,193,159 and $396,000, respectively, of property under capital leases
and incurred obligations under capital leases of $1,193,159 and
$396,000, respectively, in non-cash investing and financing activities.
15. FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments approximate
fair value.
16. CONTINGENCIES
The Company is one of many defendants in a lawsuit in Arizona state
court in a products liability case. The lawsuit is venued in Maricopa
County, Arizona and was commenced in 1997. The plaintiff is an Arizona
company and its insurance carrier who claim that one or more of the
many defendants caused a shipment of vaccine purchased by the primary
plaintiff to have become unusable as a result of a defective
refrigeration system in which the vaccine was stored. The plaintiff's
theory is that one or more components of the refrigeration system was
defective and the plaintiff and its insurance carrier have sued
virtually every company that manufactured, produced or distributed any
aspect of the refrigeration system. Damages in excess of $1,000,000 are
being sought by the plaintiff and its insurance carrier, although the
Company seems to have had a relatively minor role in or relationship to
the manufacturing and production process. The case is in a relatively
early stage making it difficult to assess the Company's ultimate likely
exposure. However, management believes that this claim is not valid and
that the probability of loss is remote. In addition, if any loss occurs
the Company has sufficient insurance coverage to cover the claim.
Consequently, no liability has been recorded in the financial
statements in connection with this lawsuit.
The Company had cash balances in bank accounts in excess of FDIC
insurance coverage of $159,823 at December 31, 1997.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by Item 9 concerning the directors and
executive officers of the Company is incorporated by reference to the Company's
definitive proxy statement for its 1998 Annual Meeting of Shareholders under the
captions "Election of Directors" and "Executive Officers of the Company."
The information required by Item 9 concerning compliance with Section
16(a) of the Exchange Act is incorporated by reference to the Company's
definitive proxy statement for its 1998 Annual Meeting of Shareholders under the
caption "Compliance with Section 16(a) of the Exchange Act."
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated by reference to the
Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders
under the caption "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated by reference to the
Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders
under the caption "Principal Shareholders and Management Shareholdings."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following Exhibits are included in this report: See
"Exhibit Index" immediately following the signature page of this Form 10-KSB.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
WINLAND ELECTRONICS, INC.
("Company")
Dated: March 25, 1998 /s/ W. Kirk Hankins
W. Kirk Hankins, President, Chief
Executive Officer and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Company,
in the capacities, and on the dates, indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints W.
Kirk Hankins and Lorin E. Krueger as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report on Form 10-KSB and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
<PAGE>
Signature and Title Date
/s/ W. Kirk Hankins March 25, 1998
W. Kirk Hankins, President,
Chief Executive Officer, Chief
Financial Officer and Director
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
/s/ Lorin E. Krueger March 25, 1998
Lorin E. Krueger, Senior Vice
President of Operations and Director
/s/ S. Robert Dessalet March 25, 1998
S. Robert Dessalet, Director
/s/ Kirk P. Hankins March 25, 1998
Kirk P. Hankins, Vice President of Marketing
and Director
/s/ Thomas J. de Petra March 25, 1998
Thomas J. de Petra, Director
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-KSB
For the fiscal year ended Commission File No. 0-18393
December 31, 1997
--------------------------
WINLAND ELECTRONICS, INC.
--------------------------
Exhibit
Number Item
3.1 Restated Articles of Incorporation, as amended (Incorporated by
reference to Exhibit 3.1 to Form 10-KSB for the fiscal year ended
December 31, 1994)
3.2 Restated Bylaws (Incorporated by reference to Exhibit 3.2 to
Registration Statement on Form S-4, SEC File No. 33-31246)
4.1 Specimen of Common Stock certificate (Incorporated by reference to
Exhibit 4 to Registration Statement on Form S-4, SEC File No. 33-31246)
10.1 Winland Electronics, Inc. 1989 Stock Option Plan (Incorporated by
reference to Exhibit 10.6 to Registration Statement on Form S-4, SEC
File No. 33-31246)**
10.2 Amendment to Winland Electronics, Inc. 1989 Stock Option Plan
(Incorporated by reference to Exhibit 10.4 to Form 10-KSB for the
fiscal year ended December 31, 1993)**
10.3 Form of Incentive Stock Option Agreement for use under the 1989 Stock
Option Plan (Incorporated by reference to Exhibit 10.7 to Registration
Statement on Form S-4, SEC File No. 33-31246)**
10.4 Amendment to Winland Electronics, Inc. 1989 Stock Option Plan dated
December 22, 1994 (Incorporated by reference to Exhibit 10.4 to Form
10-KSB for the fiscal year ended December 31, 1994)**
10.5 Form of Nonqualified Stock Option Agreement for use under the 1989
Stock Option Plan (Incorporated by reference to Exhibit 10.8 to
Registration Statement on Form S-4, SEC File No. 33-31246)**
10.6 Construction Loan Agreement dated October 5, 1994 between the Company
and The City of Mankato, Minnesota (Incorporated by reference to
Exhibit 10.9 to Form 10-KSB for the fiscal year ended December 31,
1994)
<PAGE>
10.7 $1,935,000 Combination Mortgage, Security Agreement and Fixture
Financing Statement dated August 3, 1994 by the Company to The City of
Mankato, Minnesota (Incorporated by reference to Exhibit 10.10 to Form
10-KSB for the fiscal year ended December 31, 1994)
10.8 Promissory Note of the Company in the principal amount of $1,699,620
dated October 6, 1994 in favor of The City of Mankato, Minnesota
(Incorporated by reference to Exhibit 10.11 to Form 10-KSB for the
fiscal year ended December 31, 1994)
10.9 Development Agreement dated July 29, 1994 between the Company and The
City of Mankato, Minnesota (Incorporated by reference to Exhibit 10.12
to Form 10-KSB for the fiscal year ended December 31, 1994)
10.10 Agreement for Loan of Small Cities Development Program Funds dated
October 6, 1994 between the Company and The City of Mankato, Minnesota
(Incorporated by reference to Exhibit 10.13 to Form 10-KSB for the
fiscal year ended December 31, 1994)
10.11 Promissory Note of the Company in the principal amount of $500,000
dated October 6, 1994 in favor of The City of Mankato, Minnesota
(Incorporated by reference to Exhibit 10.14 to Form 10-KSB for the
fiscal year ended December 31, 1994)
10.12 Supplemental Bonus Plan for W. Kirk Hankins and Lorin Krueger adopted
May 22, 1995 (Incorporated by reference to Exhibit 10.14 to Form 10-KSB
for the fiscal year ended December 31, 1995)**
10.13 Employment Agreement dated May 15, 1995 between the Company and W. Kirk
Hankins (Incorporated by reference to Exhibit 10.15 to Form 10-KSB for
the fiscal year ended December 31, 1995)**
10.14 Employment Agreement dated May 15, 1995 between the Company and Lorin
E. Krueger (Incorporated by reference to Exhibit 10.16 to Form 10-KSB
for the fiscal year ended December 31, 1995)**
10.15 Employment Agreement dated July 15, 1995 between the Company and Kirk
P. Hankins (Incorporated by reference to Exhibit 10.17 to Form 10-KSB
for the fiscal year ended December 31, 1995)**
10.16 Credit Agreement dated January 31, 1996 between the Company and Norwest
Bank Minnesota South, National Association (Incorporated by reference
to Exhibit 10.18 to Form 10-KSB for the fiscal year ended December 31,
1995)
<PAGE>
10.17 Security Agreement dated January 31, 1996 between the Company and
Norwest Bank Minnesota South, National Association (Incorporated by
reference to Exhibit 10.20 to Form 10-KSB for the fiscal year ended
December 31, 1995)
10.18 First Amendment dated October 21, 1996 to Credit Agreement dated
January 31, 1996 between the Company and Norwest Bank Minnesota South,
National Association (Incorporated by reference to Exhibit 10.1 to Form
10-QSB for the quarter ended September 30, 1996)
10.19 Revolving Note dated October 21, 1996 in the principal amount of
$3,500,000 in favor of Norwest Bank Minnesota South, National
Association (Incorporated by reference to Exhibit 10.2 to Form 10-QSB
for the quarter ended September 30, 1996)
10.20 Term Note dated October 21, 1996 in the principal amount of $500,000 in
favor of Norwest Bank Minnesota South, National Association
(Incorporated by reference to Exhibit 10.3 to Form 10-QSB for the
quarter ended September 30, 1996)
10.21 Winland Electronics, Inc. 1997 Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 10.1 to Form 10-QSB for the
quarter ended June 30, 1997)**
10.22 Winland Electronics, Inc. 1997 Stock Option Plan (Incorporated by
reference to Exhibit 10.2 to Form 10-QSB for the quarter ended June 30,
1997)**
10.23 Form of Incentive Stock Option Plan under 1997 Stock Option Plan
(Incorporated by reference to Exhibit 10.3 to Form 10-QSB for the
quarter ended June 30, 1997)**
10.24 Form of Nonqualified Stock Option Plan under 1997 Stock Option Plan
(Incorporated by reference to Exhibit 10.4 to Form 10-QSB for the
quarter ended June 30, 1997)**
23.1* Consent of Ahern Montag & Vogler, Ltd.
24.1* Power of Attorney for W. Kirk Hankins, Lorin E. Krueger, S. Robert
Dessalet, Kirk P. Hankins and Thomas J. de Petra (included on signature
page of this Form 10-KSB)
27* Financial Data Schedule (included with electronic filing only)
* Filed herewith.
** Management agreement or compensatory plan or arrangement.
EXHIBIT 23.1
Consent of Independent Auditors
As independent auditors for Winland Electronics, Inc. (the "Company"), we hereby
consent to the incorporation of our report dated February 4, 1998 included in
this Form 10-KSB into the Company's previously filed Registration Statements on
Form S-3, No. 333-723, and on Form S-8, No. 33-46710, No. 33-81880, No.
33-73328, No. 333-27727 and No. 333-27729.
/s/ AHERN MONTAG & VOGLER, LTD.
March 20, 1998
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