UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________________
FORM
10-K/A
(Amendment
No. 2)
þ ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2007
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from _______________ to _______________
Commission
File No.: 1-15637
WINLAND
ELECTRONICS, INC.
(Exact
name of registrant in its charter)
|
Minnesota
|
41-0992135
|
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification Number)
|
|
1950
Excel Drive, Mankato Minnesota
|
56001
|
|
(Address
of principal executive offices)
|
(Zip
code)
|
Registrant’s
telephone number, including area code: (507) 625-7231
Securities
registered pursuant to Section 12(b) of the Exchange Act:
|
Title of Each
Class
|
Name of
Exchange
|
|
Common
Stock, $.01 par value
|
American
Stock Exchange
|
|
Preferred
Stock Purchase Rights
|
American
Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Exchange
Act: None
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yeso Noþ
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act. Yeso Noþ
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. Yesþ Noo
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act).
|
Large accelerated
filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller Reporting Company
þ
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yeso Noþ
The
aggregate market value of the Common Stock held by non-affiliates as of June 30,
2007 was approximately $11,020,390 based on the closing sale price of the
Issuer’s Common Stock on such date.
There
were 3,640,741 shares of Common Stock, $.01 par value, outstanding as of March
19, 2008.
DOCUMENTS
INCORPORATED BY REFERENCE PURSUANT TO RULE 12b-23:
Portions
of the Company’s Proxy Statement for its 2008 Annual Meeting are incorporated by
reference into Part III.
Explanatory
Note
We are
filing this Amendment No. 2 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007 (the “Original Report”) in order to amend
Item 8 of the Original Report to include a signed copy of the audit report and
to amend Item 9A of the Original Report to include the disclosures required by
Item 307 of Regulation S-K.
Other
than the amendment to Item 8 of the Original Report to include a signed copy of
the audit report and to amend Item 9A of the Original Report to include the
disclosures required by Item 307 of Regulation S-K, this Amendment No. 2
does not affect any other items in our Original Report. As a result of this
amendment, we are also filing as exhibits to this Amended Report the
certifications pursuant to section 302 and section 906 of the Sarbanes-Oxley Act
of 2002, which are currently dated.
Except as
otherwise expressly stated for the items amended in this Amendment No. 2, this
Amendment No. 2 continues to speak as of the date of the Original Report
and we have not updated the disclosure contained herein to reflect events that
have occurred since the filing of the Original Report. Accordingly, this
Amendment No. 2 should be read in conjunction with our Original Report and
our other filings made with the SEC subsequent to the filing of the Original
Report.
1
|
3
|
||
|
4-5
|
||
|
6
|
||
|
7
|
||
|
8
|
||
|
9-21
|
||
2
Report of
Independent Registered Public Accounting Firm
Winland
Electronics, Inc.
We have
audited the accompanying balance sheets of Winland Electronics, Inc. as of
December 31, 2007 and 2006, and the related statements of operations, 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2007 and 2006, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
As
described in Note 6 to the financial statements, effective January 1, 2007, the
Company adopted FASB Interpretation No. 48 Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109 (“FIN
48”).
We were
not engaged to examine management’s assertion about the effectiveness of Winland
Electronics Inc.’s internal control over financial reporting as of December 31,
2007 included in this Annual Report under the caption “Management’s Report on
Internal Control over Financial Reporting” and, accordingly, we do not express
an opinion thereon.
/s/
McGladrey & Pullen Certified Public Accountants
McGladrey
& Pullen Certified Public Accountants
Minneapolis,
MinnesotaMarch 21,
2008
|
Winland
Electronics, Inc.
|
||||||||
|
Balance
Sheets
|
||||||||
|
December
31, 2007 and 2006
|
||||||||
|
(In
Thousands, Except Share Data)
|
||||||||
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Cash
and cash equivalents
|
$
|
1,152
|
$
|
50
|
||||
|
Accounts
receivable, less allowance for doubtful accounts of
$25,000
|
||||||||
|
in
2007 and $20,000 in 2006 (Note 9)
|
3,436
|
5,165
|
||||||
|
Refundable
income taxes
|
389
|
237
|
||||||
|
Inventories
(Note 2)
|
4,708
|
6,994
|
||||||
|
Prepaid
expenses and other assets
|
253
|
364
|
||||||
|
Deferred
income taxes (Note 6)
|
400
|
278
|
||||||
|
Total
current assets
|
10,338
|
13,088
|
||||||
|
Property
and Equipment, at cost (Notes 3 and 4)
|
||||||||
|
Land
and land improvements
|
383
|
383
|
||||||
|
Building
|
3,052
|
3,048
|
||||||
|
Machinery
and equipment
|
6,798
|
6,863
|
||||||
|
Data
processing equipment
|
1,128
|
1,003
|
||||||
|
Office
furniture and equipment
|
466
|
457
|
||||||
|
Total
property and equipment
|
11,827
|
11,754
|
||||||
|
Less
accumulated depreciation
|
6,410
|
5,975
|
||||||
|
Net
property and equipment
|
5,417
|
5,779
|
||||||
|
Total
assets
|
$
|
15,755
|
$
|
18,867
|
||||
|
See
Notes to Financial Statements.
|
||||||||
|
Winland
Electronics, Inc.
|
||||||||
|
Balance
Sheets
|
||||||||
|
December
31, 2007 and 2006
|
||||||||
|
(In
Thousands, Except Share Data)
|
||||||||
|
December
31,
|
||||||||
|
Liabilities
and Stockholders’ Equity
|
2007
|
2006
|
||||||
|
Revolving
credit agreement (Note 3)
|
$
|
-
|
$
|
1,924
|
||||
|
Current
maturities of long-term debt
|
512
|
627
|
||||||
|
Accounts
payable
|
1,729
|
2,830
|
||||||
|
Accrued
expenses:
|
||||||||
|
Compensation
|
733
|
673
|
||||||
|
Other
|
379
|
323
|
||||||
|
Total
current liabilities
|
3,353
|
6,377
|
||||||
|
Long-Term
Liabilities
|
||||||||
|
Long-term
debt, less current maturities (Notes 3 and 4)
|
1,471
|
1,706
|
||||||
|
Deferred
income taxes (Note 6)
|
282
|
255
|
||||||
|
Deferred
revenue (Note 5)
|
138
|
146
|
||||||
|
Other
long term tax liabilities
|
129
|
-
|
||||||
|
Total
long-term liabilities
|
2,020
|
2,107
|
||||||
|
Total
liabilities
|
5,373
|
8,484
|
||||||
|
Commitments
and Contingencies (Notes 4, 7, 8 and 10)
|
||||||||
|
Stockholders’
Equity (Notes 7 and 10)
|
||||||||
|
Common
stock, par value $0.01 per share; authorized 20,000,000
|
||||||||
|
shares;
issued and outstanding 3,640,741 shares in 2007 and 3,599,856 shares in
2006
|
36
|
36
|
||||||
|
Additional
paid-in capital
|
4,691
|
4,429
|
||||||
|
Retained
earnings
|
5,655
|
5,918
|
||||||
|
Total
stockholders’ equity
|
10,382
|
10,383
|
||||||
|
Total
liabilities and stockholders’ equity
|
$
|
15,755
|
$
|
18,867
|
||||
|
See
Notes to Financial Statements.
|
||||||||
|
Winland
Electronics, Inc.
|
||||||||
|
Statements
of Operations
|
||||||||
|
Years
Ended December 31, 2007 and 2006
|
||||||||
|
(In
Thousands, Except Share Data)
|
||||||||
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
$
|
34,746
|
$
|
37,945
|
|||||
|
Cost
of sales
|
29,960
|
31,440
|
||||||
|
Gross
profit
|
4,786
|
6,505
|
||||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
2,648
|
2,480
|
||||||
|
Sales
and marketing
|
1,709
|
1,637
|
||||||
|
Research
and development
|
1,049
|
642
|
||||||
|
5,406
|
4,759
|
|||||||
|
Operating
income (loss)
|
(620
|
)
|
1,746
|
|||||
|
Other
income (expenses):
|
||||||||
|
Interest
expense
|
(261
|
)
|
(187
|
)
|
||||
|
Other,
net
|
89
|
9
|
||||||
|
(172
|
)
|
(178
|
)
|
|||||
|
Income
(loss) before income taxes
|
(792
|
)
|
1,568
|
|||||
|
Income
tax benefit (expense) (Note 6)
|
529
|
(530
|
)
|
|||||
|
Net
income (loss)
|
$
|
(263
|
)
|
$
|
1,038
|
|||
|
Earnings
(loss) per common share data:
|
||||||||
|
Basic
|
$
|
(0.07
|
)
|
$
|
0.29
|
|||
|
Diluted
|
$
|
(0.07
|
)
|
$
|
0.28
|
|||
|
Weighted-average
number of common shares outstanding:
|
||||||||
|
Basic
|
3,615,108
|
3,553,062
|
||||||
|
Diluted
|
3,615,108
|
3,653,891
|
||||||
|
See
Notes to Financial Statements.
|
||||||||
|
Winland
Electronics, Inc.
|
||||||||||||||||||||
|
Statements
of Changes in Stockholders’ Equity
|
||||||||||||||||||||
|
Years
Ended December 31, 2007 and 2006
|
||||||||||||||||||||
|
(In
Thousands, Except Share Data)
|
||||||||||||||||||||
|
Additional
|
||||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Retained
|
||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Total
|
||||||||||||||||
|
3,527,915
|
$
|
35
|
$
|
4,164
|
$
|
4,880
|
$
|
9,079
|
||||||||||||
|
Issuance
of common stock in accordance with employee stock
|
||||||||||||||||||||
|
purchase
plan (Note 8)
|
8,375
|
-
|
24
|
-
|
24
|
|||||||||||||||
|
Issuance
of common stock in accordance with employee stock
|
||||||||||||||||||||
|
option
plan (Note 7)
|
63,566
|
1
|
52
|
-
|
53
|
|||||||||||||||
|
Stock-based
compensation expense for employee stock
|
||||||||||||||||||||
|
purchase
plan
|
-
|
-
|
10
|
-
|
10
|
|||||||||||||||
|
Stock-based
compensation expense for stock options
|
-
|
-
|
128
|
-
|
128
|
|||||||||||||||
|
Tax
benefit from disqualifying disposition of stock options
|
-
|
-
|
43
|
-
|
43
|
|||||||||||||||
|
Stock-based
expense for warrants (Note 7)
|
-
|
-
|
8
|
-
|
8
|
|||||||||||||||
|
Net
income
|
-
|
-
|
-
|
1,038
|
1,038
|
|||||||||||||||
|
Balance
on December 31, 2006
|
3,599,856
|
$
|
36
|
$
|
4,429
|
$
|
5,918
|
$
|
10,383
|
|||||||||||
|
Issuance
of common stock in accordance with employee stock
|
||||||||||||||||||||
|
purchase
plan (Note 8)
|
10,365
|
-
|
24
|
-
|
24
|
|||||||||||||||
|
Issuance
of common stock in accordance with employee stock
|
||||||||||||||||||||
|
option
plan (Note 7)
|
30,520
|
-
|
27
|
-
|
27
|
|||||||||||||||
|
Stock-based
compensation expense for employee stock
|
||||||||||||||||||||
|
purchase
plan
|
-
|
-
|
11
|
-
|
11
|
|||||||||||||||
|
Stock-based
compensation expense for stock options
|
-
|
-
|
167
|
-
|
167
|
|||||||||||||||
|
Tax
benefit from disqualifying disposition of stock options
|
-
|
-
|
10
|
-
|
10
|
|||||||||||||||
|
Stock-based
expense for warrants (Note 7)
|
-
|
-
|
23
|
-
|
23
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
(263
|
)
|
(263
|
)
|
|||||||||||||
|
Balance
on December 31, 2007
|
3,640,741
|
$
|
36
|
$
|
4,691
|
$
|
5,655
|
$
|
10,382
|
|||||||||||
|
See
Notes to Financial Statements.
|
||||||||||||||||||||
|
Winland
Electronics, Inc.
|
||||||||
|
Statements
of Cash Flows
|
||||||||
|
Years
Ended December 31, 2007 and 2006
|
||||||||
|
(In
Thousands of Dollars)
|
||||||||
|
2007
|
2006
|
|||||||
|
Cash
Flows From Operating Activities
|
||||||||
|
$
|
(263
|
)
|
$
|
1,038
|
||||
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
||||||||
|
Depreciation
|
879
|
812
|
||||||
|
Loss
on disposal of equipment
|
1
|
8
|
||||||
|
Investor
relations expense, non-cash warrants
|
-
|
3
|
||||||
|
Consulting
expense, non-cash warrants
|
23
|
8
|
||||||
|
Non-cash
stock based compensation
|
178
|
137
|
||||||
|
Deferred
taxes
|
(95
|
)
|
(48
|
)
|
||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
1,729
|
(1,132
|
)
|
|||||
|
Refundable
income taxes
|
(152
|
)
|
(189
|
)
|
||||
|
Inventories
|
2,286
|
(3,471
|
)
|
|||||
|
Prepaid
expenses and other assets
|
111
|
(52
|
)
|
|||||
|
Accounts
payable
|
(1,101
|
)
|
1,343
|
|||||
|
Accrued
expenses, including deferred revenue and other long term tax
liabilities
|
237
|
(13
|
)
|
|||||
|
Net
cash provided by (used in) operating activities
|
3,833
|
(1,556
|
)
|
|||||
|
Cash
Flows From Investing Activities
|
||||||||
|
Purchases
of property and equipment
|
(228
|
)
|
(715
|
)
|
||||
|
Proceeds
from sale of property and equipment
|
20
|
-
|
||||||
|
Net
cash used in investing activities
|
(208
|
)
|
(715
|
)
|
||||
|
Cash
Flows From Financing Activities
|
||||||||
|
Net
borrowings (payments) on revolving credit agreement
|
(1,924
|
)
|
1,924
|
|||||
|
Net
principal payments on long-term borrowings, including capital lease
obligations
|
(660
|
)
|
(587
|
)
|
||||
|
Proceeds
from issuance of common stock
|
51
|
76
|
||||||
|
Tax
benefit from options exercised
|
10
|
43
|
||||||
|
Net
cash provided by (used in) financing activities
|
(2,523
|
)
|
1,456
|
|||||
|
Net
increase (decrease) in cash
|
1,102
|
(815
|
)
|
|||||
|
Cash
and cash equivalents
|
||||||||
|
Beginning
of year
|
50
|
865
|
||||||
|
End
of year
|
$
|
1,152
|
$
|
50
|
||||
|
Supplemental
Disclosures of Cash Flow Information
|
||||||||
|
Cash
payments for:
|
||||||||
|
Interest
|
$
|
276
|
$
|
171
|
||||
|
Income
taxes
|
$
|
-
|
$
|
726
|
||||
|
Supplemental
Schedule of Noncash Investing and Financing Activities
|
||||||||
|
Acquisition
of property under capital leases
|
$
|
310
|
$
|
957
|
||||
|
See
Notes to Financial Statements.
|
||||||||
Nature of business: Winland
Electronics, Inc. (Winland or the Company) operates in one business segment,
which includes the design and manufacture of electronic control devices. Sales
are to customers located primarily in the upper Midwest.
A summary
of Winland’s significant accounting policies follow:
Use of estimates: The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
related disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates include allowances for
obsolete inventories, rework and warranties, and doubtful
accounts. Winland cannot assure that actual results will not differ
from those estimates.
Revenue Recognition: In most cases, revenue
is recognized from the sale of products and out of warranty repairs when the
product is delivered to a common carrier for shipment and title
transfers.
With one
particular customer, Winland recognizes revenue from the sale of customized
products when the product is delivered to a customer warehouse location within
its facility, title is transferred and risk of loss and ownership passes to the
buyer. These sales are subject to written purchase orders including a
fixed schedule for delivery; the date for delivery is reasonable and consistent
with the buyer’s business purpose. The product cannot be used to
fulfill other customers’ orders, as this is a unique product for this customer
only. Winland is the sole supplier source of this product for this customer.
Because of the unique nature of this product, the customer must have stock on
hand and ready to ship to their customers and, therefore, has requested that the
transaction be on a bill and hold basis. Since the customer does not
have its own warehouse, they rent warehouse space from Winland paying a monthly
rental charge based on the number of pallets containing their inventory. The
customer’s credit and payment terms are the same as all other OEM
customers.
Another
portion of Winland’s business involves shipping product to a primary customer’s
location where it is held in a separate warehouse. Revenue is
recognized when that customer notifies Winland that the inventory has been
removed from the warehouse and title to the product is transferred.
Revenue
recognition occurs for engineering design services as services are
completed. Winland has an agreement with one particular customer to
amortize the cost of engineering design services as part of the piece part cost
of the manufactured unit. As of December 31, 2007, the customer has
paid Winland approximately $181,000 for these services which have yet to be
amortized into manufactured units. The $181,000 payment is classified
as unearned revenue and recorded in Other Accrued Expenses on the balance sheet
as of December 31, 2007.
Shipping
and handling charges billed to customers are included in net sales, and shipping
and handling costs incurred by the Company are included in cost of goods sold.
For all sales, Winland either has a binding purchase order or customer accepted
and signed engineering quote as evidence of the arrangement. Winland
does not generally accept returns but does provide a limited warranty as
outlined below under Allowance for Rework and Warranty Costs.
Cash and cash equivalents:
Cash and cash equivalents include money market mutual funds and other highly
liquid investments. Winland maintains its cash in bank deposit
accounts which, at times, may exceed federally insured limits. Winland has not
experienced any losses in such accounts.
Note
1. Nature of Business and Significant Accounting Policies
(Continued)
Accounts receivable and Allowance for
Doubtful Accounts: Accounts receivable are carried at original invoice
amount less an estimate made for uncollectible accounts. Winland
evaluates its allowance for uncollectible accounts on a quarterly basis and
reviews any significant customers with delinquent balances to determine future
collectability. Winland bases its determinations on legal issues (such as
bankruptcy status), past history, current financial and credit agency reports,
and experience. Winland reserves for accounts deemed to be uncollectible in the
quarter in which the determination is made. Management believes these
values are estimates and may differ from actual results. Winland
believes that, based on past history and credit policies, the net accounts
receivable are of good quality. Write offs for the year ended
December 31, 2007 and 2006 were $31,000 and $0, respectively. The
Allowance for Doubtful Accounts was $25,000 and $20,000 at December 31, 2007 and
2006, respectively.
Inventory Valuation: Finished goods
inventories are stated at the lower of cost, using the first-in, first-out
(FIFO) method, or market value. Raw component inventories are stated
at standard costs identified and updated annually or when significant changes in
costs are identified using the last received cost. Winland makes
provisions for slow moving, estimated excess and obsolete inventory based on
historical experience, an analysis of the existing inventory and specific
identification of obsolete inventory. Management’s estimated reserve for slow
moving and obsolete inventories was $460,000 and $190,000 as of December 31,
2007 and 2006, respectively.
In
addition to the above methodology, Winland has developed procedures that will
provide for estimated excess, slow moving and obsolete inventory reserves based
on quarterly reviews for its major customers and annual reviews for lower volume
customers of inventory quantities on hand and on order in conjunction with the
latest forecasts of product demand and production requirements from these
customers. Inventory not specific to a customer is evaluated at least
annually.
Depreciation: Depreciation is
computed using the straight-line method based on the estimated useful lives of
the various assets or capital lease term, as follows:
|
Years
|
||||
|
Land
improvements
|
17
– 20
|
|||
|
Building
|
39
– 40
|
|||
|
Machinery
and equipment
|
5 –
7
|
|||
|
Data
processing equipment
|
3 –
7
|
|||
|
Office
furniture and equipment
|
3 –
7
|
|||
Long-lived assets: Winland
reviews its long-lived assets periodically to determine potential impairment by
comparing the carrying value of the long-lived assets with the estimated future
cash flows expected to result from the use of the assets, including cash flows
from disposition. Should the sum of the expected future cash flows be less than
the carrying value, Winland would recognize an impairment loss. An impairment
loss would be measured by comparing the amount by which the carrying value
exceeds the fair value of the long-lived assets. There were no
impairment losses recognized in 2007 and 2006.
Allowance for Rework and Warranty
Costs. Winland
has established a warranty reserve for rework, product warranties and customer
refunds. Winland provides a limited warranty to its OEM
customers who require us to repair or replace product that is defective, due to
Company workmanship issues, at no cost to the customer. In addition,
Winland provides a limited warranty for its proprietary products for a period of
one year, which requires Winland to repair or replace defective product at no
cost to the customer or refund the purchase price. Reserves are
established based on historical experience and analysis for specific known and
potential warranty issues. The reserve reflecting historical
experience and potential warranty issues is determined based on warranty expense
for the prior six-month period as a percentage of sales. Any specific
known warranty issues are considered individually. These are
analyzed to determine the probability and the amount of financial exposure, and
a specific reserve is established. The allowance for rework and
warranty costs was $160,000 as of December 31, 2007 and $126,000 as of December
31, 2006. The product warranty liability reflects management’s best
estimate of probable liability under Winland’s product warranties and may differ
from actual results.
Note
1. Nature of Business and Significant Accounting Policies
(Continued)
Changes
in Winland’s warranty liability, which is included in other accrued expenses on
the balance sheets, are approximately as follows:
|
Years
Ended December 31
|
||||||||
|
2007
|
2006
|
|||||||
|
Balance,
beginning
|
$
|
126,000
|
$
|
117,000
|
||||
|
Accruals
for products sold
|
636,000
|
249,000
|
||||||
|
Payments
made
|
(602,000
|
)
|
(240,000
|
)
|
||||
|
Balance,
ending
|
$
|
160,000
|
$
|
126,000
|
||||
Income
taxes: Income taxes are accounted for in accordance with FAS
No. 109, "Accounting for Income Taxes" ("FAS 109") as clarified by FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes ("FIN 48").
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. In
assessing the realizability of deferred income tax assets, we consider whether
it is "more likely than not," according to the criteria of FAS 109, that some
portion or all of the deferred income tax assets will be realized. The ultimate
realization of deferred income tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. FIN 48 requires that we recognize the financial statement
benefit of a tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit. For tax
positions meeting the more likely than not threshold, the amount recognized in
the financial statements is the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the relevant tax
authority.
Fair value of financial
instruments: Management estimates that the carrying value of long-term
debt approximates fair value, estimated based on interest rates for the same or
similar debt offered to Winland having the same or similar remaining maturities
and collateral requirements. The carrying value of accounts receivable and
accounts payable approximate fair value due to the short-term nature of these
instruments.
Earnings (loss) per common
share: Basic earnings (loss) per common share are computed by dividing
net income (loss) by the weighted-average number of common shares outstanding
during the period. Diluted earnings per common share is computed by dividing net
income by the weighted-average number of common shares outstanding during the
period, including potentially dilutive shares such as the options and warrants
to purchase shares of common stock at various amounts per share (see Note
7). For year ended December 31, 2007, the diluted loss per share was
the same as basic loss per share since the effects of options and warrants would
have been anti-dilutive. The diluted share calculation excluded 27,080 weighted
average shares due to the net loss for the year ended December 31,
2007. The dilutive effect of the additional shares for the year ended
December 31, 2006 was to increase the weighted-average shares outstanding
by 100,829.
Employee stock plans: At
December 31, 2007, Winland had stock-based compensation plans, which are
described more fully in Note 7. Winland accounts for these plans
under the fair value recognition provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), using the
modified-prospective-transition method. Under this transition method,
compensation cost recognized for the twelve months ended December 31, 2007 and
2006 includes compensation costs for all share-based awards granted prior to
January 1, 2006, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions of
SFAS 123, and compensation cost for all share-based payments granted subsequent
to December 31, 2005 based on the grant date fair value estimated in accordance
with the provisions of SFAS 123R.
Note
1. Nature of Business and Significant Accounting Policies
(Continued)
Research and development
expense: Winland expenses research and development costs as incurred.
Research and development expenses of $1,049,000 and $642,000 were charged to
operations during the years ended December 31, 2007 and 2006,
respectively.
Recently issued accounting
pronouncements: In September 2006, the Financial Accounting
Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework and gives
guidance regarding the methods used for measuring fair value, and expands
disclosures about fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. We are required to
adopt SFAS 157 in the first quarter of 2008. We believe that the
financial impact, if any, of adopting SFAS 157 will not result in a material
impact to our financial statements.
On
February 15, 2007, the FASB, issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”). SFAS No. 159
gives entities the option to measure eligible financial assets and financial
liabilities at fair value on an instrument by instrument basis, that are
otherwise not permitted to be accounted for at fair value under other accounting
standards. The election to use the fair value option is available
when an entity first recognizes a financial asset or financial
liability. Subsequent changes in fair value must be recorded in
earnings. SFAS 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. We are required to adopt SFAS 159 in the first quarter
of 2008. We believe that the financial impact, if any, of adopting
SFAS 159 will not result in a material impact to our financial
statements.
In
December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS
141R”). SFAS 141R requires the acquiring entity in a business
combination to recognize all the assets acquired and liabilities assumed in the
transaction at fair value as of the acquisition date. SFAS 141R is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. This standard will change our accounting treatment
for business combinations on a prospective basis.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS 160”). SFAS 160
requires all entities to report noncontrolling interests as equity in the
consolidated financial statements. SFAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company does not expect the adoption of this
statement will have a material impact on its financial position or results of
operations.
Note
2. Inventories
The
components of inventories at December 31, 2007 and 2006, were as
follows:
|
December
31
|
||||||||
|
2007
|
2006
|
|||||||
|
Raw
materials
|
$
|
3,467,000
|
$
|
4,764,000
|
||||
|
Work
in progress
|
293,000
|
327,000
|
||||||
|
Finished
goods
|
948,000
|
1,903,000
|
||||||
|
Total
|
$
|
4,708,000
|
$
|
6,994,000
|
||||
Note
3. Financing Arrangement and Long-Term Debt
Winland
has a $4,000,000 revolving line of credit agreement with M&I Bank of
Minneapolis, Minnesota, expiring June 30, 2008, if not renewed. Advances
are due on demand, secured by substantially all assets of Winland, and are
subject to a defined borrowing base equal to 80% of qualified accounts
receivable and 50% of qualified inventory. Interest on advances
accrues at the LIBOR rate plus two and one-half percent (2.5%), which was 7.1%
as of December 31, 2007. Advances outstanding on the revolving line
of credit agreement as of December 31, 2007 and 2006 were $0 and $1,924,000,
respectively. At December 31, 2007, $4,000,000 was available for
borrowing under the terms of this agreement. See also (a)
following.
During
2006, Winland entered into a Master Lease of Personal Property with M&I
Equipment Finance Company of Milwaukee, Wisconsin. Under the lease, Winland can
acquire new capital equipment to be used in its manufacturing processes.
Individual leases under the master agreement have a 60-month term bearing an
interest rate equal to the 30-month LIBOR swap rate plus 225 basis points
effective the date each individual lease is approved. As of December
31, 2007 and 2006, Winland had drawn funds under this lease agreement totaling
$1,268,000 and $957,000, respectively, of which $1,019,000 and $908,000 remained
outstanding, respectively.
Long-term debt: The following
is a summary of long-term debt:
|
December
31
|
||||||||
|
2007
|
2006
|
|||||||
|
6.44%
note payable, due in monthly installments of $11,373,
including
|
||||||||
|
interest,
to October 1, 2014, when the remaining balance is payable,
|
||||||||
|
secured
by property (a), (b)
|
$
|
741,000
|
$
|
826,000
|
||||
|
4.91%
note payable, principal due in monthly installments of
$20,833,
|
||||||||
|
with
interest to April 1, 2008, when the remaining balance is
payable,
|
||||||||
|
secured
by property and equipment (a)
|
59,000
|
310,000
|
||||||
|
6.50%
note payable, principal due in monthly installments of
$10,417,
|
||||||||
|
with
interest to May 31, 2009, when the remaining balance is
payable,
|
||||||||
|
secured
by property and equipment (a)
|
164,000
|
289,000
|
||||||
|
Capital
lease obligations bearing interest ranging from 6.25% to
8.01%,
|
||||||||
|
due
in monthly installments of $1,138 to $6,426, to December
2012,
|
||||||||
|
secured
by equipment
|
1,019,000
|
908,000
|
||||||
|
$
|
1,983,000
|
$
|
2,333,000
|
|||||
|
Less
current maturities
|
512,000
|
627,000
|
||||||
|
Total
long-term debt
|
$
|
1,471,000
|
$
|
1,706,000
|
||||
(a)
These agreements have certain financial and non-financial covenants, which,
among others, require the Company to maintain a minimum tangible net worth, a
maximum leverage ratio, a maximum debt to tangible net worth, a minimum cash
flow coverage ratio, imposes limits on capital expenditures and disallows the
declaration or payment of dividends.
(b)
As of December 31, 2007, Winland was in violation of the minimum cash flow
coverage covenant for this agreement. The issuing financial institution
has granted a waiver of this covenant as of December 31, 2007.
Note
3. Financing Arrangement and Long-Term Debt (Continued)
Approximate
maturities of long-term debt for years subsequent to December 31, 2007, are
as follows:
|
2008
|
$
|
512,000
|
||
|
2009
|
392,000
|
|||
|
2010
|
380,000
|
|||
|
2011
|
332,000
|
|||
|
2012
|
148,000
|
|||
|
Thereafter
|
219,000
|
|||
|
Total
|
$
|
1,983,000
|
Capital leases: The cost and
accumulated depreciation of assets acquired under capital leases at December 31,
2007 and 2006, were as follows:
|
2007
|
2006
|
|||||||
|
Cost
|
$
|
1,714,000
|
$
|
1,404,000
|
||||
|
Accumulated
depreciation
|
696,000
|
454,000
|
||||||
|
Net
leased property under capital leases
|
$
|
1,018,000
|
$
|
950,000
|
||||
The
future minimum lease payments under capital leases and the aggregate present
value of the net minimum lease payments at December 31, 2007, are approximately
as follows:
|
Minimum
Lease Payments:
|
||||
|
2008
|
$
|
307,000
|
||
|
2009
|
307,000
|
|||
|
2010
|
306,000
|
|||
|
2011
|
231,000
|
|||
|
2012
|
30,000
|
|||
|
1,181,000
|
||||
|
Less
amount representing interest
|
162,000
|
|||
|
Present
value of net minimum lease payments (included in long-term debt) (Note
3)
|
$
|
1,019,000
|
||
Note
4. Commitments and Contingencies
Separation
Agreement: At December 31, 2007, Winland had a commitment to
pay $196,625 to its former President and Chief Executive Officer, Lorin Krueger
as part of the separation agreement between the Company and Mr.
Krueger. Effective, January 3, 2008, Winland’s Chairman of the Board
will act as interim President and Interim Chief Executive Officer.
Environmental
Regulations: The European Union (“EU”) has two directives,
Restriction of the use of Certain Hazardous Substances (“RoHS”) and Waste
Electrical and Electronic Equipment (“WEEE”), which affect the worldwide
electronics supply-chain and Winland’s processes and products. As of
December 31, 2007, Winland had not accrued for costs such as on-going compliant
efforts, shipping delays or liability for non-compliant products due to these
directives. At this time, Winland cannot reasonably estimate the
amount of future liability, if any.
Note
5. Deferred Revenue
During
1994, Winland and the city of Mankato entered into a tax increment financing
agreement for the construction of its operating facility. In connection with
this agreement, the city donated land improvements to Winland with a fair value
of $270,009. The fair value of land improvements donated was accounted for as
deferred revenue and is being amortized over 39 years, which is the life of the
building.
Note
6. Income Taxes
Components
of income tax benefit (expense) are as follows:
|
December
31
|
||||||||
|
2007
|
2006
|
|||||||
|
Currently
payable
|
$
|
391,000
|
$
|
(578,000
|
)
|
|||
|
Deferred
|
138,000
|
48,000
|
||||||
|
$
|
529,000
|
$
|
(530,000
|
)
|
||||
The
statutory income tax rate reconciliation to the effective rate is as
follows:
|
December
31
|
||||||||
|
2007
|
2006
|
|||||||
|
Statutory
U.S. income tax rate
|
(34
|
)
%
|
34
|
%
|
||||
|
State
taxes, net of federal tax effect
|
(14
|
)
%
|
4
|
%
|
||||
|
Research
and Development Credits
|
(29
|
)
%
|
-
|
%
|
||||
|
Other,
including permanent differences
|
10
|
%
|
(4
|
)
%
|
||||
|
Effective
income tax rate
|
(67
|
)
%
|
34
|
%
|
||||
Net
deferred tax assets consist of the following components as of December 31, 2007
and 2006:
|
December
31
|
||||||||
|
2007
|
2006
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Inventory
|
$
|
235,000
|
$
|
150,000
|
||||
|
Allowance
for doubtful accounts
|
9,000
|
7,000
|
||||||
|
Non-qualified
stock options
|
53,000
|
27,000
|
||||||
|
Accrued
expenses
|
154,000
|
160,000
|
||||||
|
Net
operating loss carryforward
|
18,000
|
-
|
||||||
|
Other
|
34,000
|
2,000
|
||||||
|
503,000
|
346,000
|
|||||||
|
Deferred
tax liabilities:
|
||||||||
|
Property
and equipment
|
325,000
|
255,000
|
||||||
|
Prepaid
expenses
|
37,000
|
68,000
|
||||||
|
Other
|
23,000
|
-
|
||||||
|
385,000
|
323,000
|
|||||||
|
Net
deferred tax assets
|
$
|
118,000
|
$
|
23,000
|
||||
Note
6. Income Taxes (Continued)
The
deferred tax amounts mentioned above have been classified on the accompanying
balance sheets as of December 31, 2007 and 2006, as follows:
|
December
31
|
||||||||
|
2007
|
2006
|
|||||||
|
Current
assets
|
$
|
400,000
|
$
|
278,000
|
||||
|
Noncurrent
liabilities
|
(282,000
|
)
|
(255,000
|
)
|
||||
|
Net
deferred tax assets
|
$
|
118,000
|
$
|
23,000
|
||||
Effective
January 1, 2007, Winland adopted the Financial Accounting Standards Board
(“FASB”) Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement 109. As required
by FIN 48, Winland recognizes the financial statement benefit of a tax position
only after determining that the relevant tax authority would more likely than
not sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax
authority.
At the
adoption date of January 1, 2007, the Company had no unrecognized tax benefits
which needed to be adjusted. The Company had gross increases of
$129,000 of unrecognized tax benefits for the year ended December 31, 2007
relating to tax positions taken in the current period.
Included
in the balance at December 31, 2007, the Company recognized a $301,000 reduction
in income tax expense for credits filed with the Internal Revenue Service and
the State of Minnesota for tax years 2003 through 2007, net of $129,000 reserve
for FIN 48, Accounting for Uncertainty in Income Taxes.
At the
adoption date of January 1, 2007, the Company had no unrecognized tax benefits
that, if recognized, would affect the effective tax rate. As of December 31,
2007 the Company had approximately $129,000 of unrecognized tax benefits that,
if recognized, would affect the effective tax rate.
The
Company recognizes interest and penalties accrued on unrecognized tax benefits
as well as interest received from favorable tax settlements within general and
administrative expenses. At the adoption date of January 1, 2007, the
Company recognized no interest or penalties related to uncertain tax
positions. As of December 31, 2007, the Company recognized no
interest or penalties related to uncertain tax positions due to the
insignificance to its financial position and results of operations.
The
Company files income tax returns in the U.S. federal and state
jurisdictions. The Company is currently under examination by the
Internal Revenue Service (IRS) for its 2004 through 2006 tax years and the State
of Minnesota for its 2003 through 2006 tax years. The Company has not
recorded any material adjustment in the liability for unrecognized income tax
benefits related to these audits. The years 2004 through 2007 remain
open for examination by other state agencies.
Given the
fact that the Company is currently under audit by the IRS and the State of
Minnesota, it is reasonably possible that significant changes in the gross
balance of unrecognized tax benefits may occur within the next 12
months. An estimate of the range of such gross changes cannot be made
at this time. However, the Company does not expect the changes to
have a significant impact on its effective tax rate or expected cash payments
for income taxes within the next 12 months.
Note
7. Warrants and Stock-Based Compensation Plans
Warrants: On February 1, 2005,
Winland granted to Hayden Communications, Inc. warrants to purchase 20,000
shares of common stock that vested to the extent of 10,000 shares on August 1,
2005 and 10,000 shares on February 1, 2006. The term of each 10,000
share increment will extend three years from the date of vesting. As
of December 31, 2007, warrants to purchase 20,000 shares of common stock at
$3.96 were exercisable and outstanding. The warrants were valued
using the Black-Scholes pricing model and were amortized as investor relations
expense over the term of the service agreement. Investor relations
expense from the amortization of warrants was $0 and $3,123 for the years ended
December 31, 2007 and 2006, respectively.
On
February 16, 2006, Winland granted to Board Assets, Inc., a strategic planning
consultant, warrants to purchase 5,000 shares of common stock at an exercise
price of $4.01 per share. Winland scheduled two board strategy
meetings with Board Assets, Inc., one in July 2006 and the other in January
2007. Upon completion of the performance of Board Assets, Inc as
facilitator for each of those meetings, 2,500 shares were scheduled to
vest. These warrants expire on February 16, 2016, if not
exercised. As of December 31, 2007, the first 2,500 shares vested
and, using the Black-Scholes pricing model, $3.26 per share amounting
to $8,142 of consulting expense was recorded in 2006. The agreement
between Winland and Board Assets, Inc. was terminated in October
2006. Based on this termination, the second 2,500 shares did not vest
and Winland will not incur additional expense for these shares.
On
September 9, 2006, Winland granted to Steven P. Friswold and Bruce H. Senske,
principals of Genoa Business Advisors, LLC (“Genoa”), warrants for each to
purchase 10,000 shares of common stock at an exercise price of $3.40 per
share. Winland and Genoa developed two strategic business initiatives
which Genoa must execute in order for the warrants to vest. These
warrants shall vest and become exercisable to the extent of 5,000 shares each
upon completion of Initiative 1 by Genoa and 5,000 shares each upon completion
of Initiative 2 by Genoa. The warrants terminate on September 6,
2011, if not exercised. As of December 31, 2007, Initiative 1 was
complete and 5,000 shares each vested. The shares were valued using
the Black-Scholes pricing method at a fair value of $2.26 per share amounting to
$22,581 of consulting expense for the year ended December 31,
2007. The agreement between Winland and Genoa was terminated in
November 2007. Based on this termination, the second 10,000 shares
will not vest and Winland will not incur additional expense for these
shares.
Stock option and employee stock
purchase plans: As of December 31, 2007, Winland had one equity-based
compensation plan, the 2005 Equity Incentive Plan, from which stock-based
compensation awards can be granted to eligible employees, officers or
directors. Previous to this plan, stock-based compensation awards
were granted from the 1997 Stock Option Plan. The plans are as
follows:
2005
Equity Incentive Plan – This plan provides awards in the form of incentive stock
options, nonqualified stock options, and restricted stock. Currently,
this is the only plan under which awards are authorized for grant. As
approved by the shareholders in May 2005, the plan authorized issuance of up to
400,000 shares. Awards issued under the plan as of December 31, 2007
include 212,000 shares of incentive stock options and 66,000 nonqualified stock
options of which 267,000 are outstanding and 70,600 of which are vested at
December 31, 2007. The exercise price is equal to the fair market
value of Winland’s common stock at the date of grant. Options generally vest
over 5 years and have a contractual life up to 10 years. Option
awards provide for accelerated vesting if substantially all of Winland’s assets
are transferred through an acquisition, merger or reorganization.
1997
Stock Option Plan – This plan provided for grants in both the form of incentive
stock options and nonqualified stock options. The plan was terminated
as to future grants in May 2005. At December 31, 2007 there were
104,100 options outstanding under this plan of which 92,940 are
vested.
Note
7. Warrants and Stock-Based Compensation Plans (Continued)
1997
Employee Stock Purchase Plan – The Employee Stock Purchase Plan (ESPP) has
provided Winland employees the opportunity to purchase common stock through
payroll deductions. The purchase price is set at the lower of 85% of
the fair market value of common stock at the beginning of the participation
period or 85% of the fair market value on the purchase date. The
participation periods have a 6-month duration beginning in January and July of
each year. A total of 100,000 shares of common stock were authorized
for issuance under the ESPP of which 90,191have been issued. The ESPP
expired on December 31, 2007. Winland issued 10,365 and 8,375 shares
for the years ended December 31, 2007 and 2006, respectively, incurring $10,780
and $9,926 of compensation expense under this plan for the same
periods.
Prior to
January 1, 2006, Winland accounted for its equity-based compensation plans under
the recognition and measurement provision of APB Opinion No. 25, Accounting for Stock Issued to
Employees (“APB 25”), and related Interpretations, as permitted by
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”). Effective January 1, 2006, Winland
adopted the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS
123R”), using the modified-prospective-transition method. Under this
transition method, compensation cost recognized in the years ended December 31,
2007 and 2006 includes compensation costs for all share-based payments granted
prior to January 1, 2006, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions of
SFAS 123, and compensation cost for all share-based payments granted subsequent
to December 31, 2005 based on the grant date fair value estimated in accordance
with the provisions of SFAS 123R.
Winland’s
stock based compensation expense for the years ended December 31, 2007 and 2006
was $178,000 and $137,000 higher than if Winland had continued to account for
stock-based compensation under APB Opinion No. 25 for its stock option grants to
employees. A total of $43,000 and $8,000 such expense was capitalized
in inventory costs for the years ended December 31, 2007 and 2006,
respectively.
Winland
uses the Black-Scholes option pricing model to estimate the fair value of
stock-based awards with the following weighted-average assumptions for the
indicated periods.
|
December
31
|
||||||||
|
2007
|
2006
|
|||||||
|
Expected
life, in years
|
5-10
|
5-10
|
||||||
|
Expected
volatility
|
69.9
|
%
|
81.9
|
%
|
||||
|
Risk-free
interest rate
|
4.4
|
%
|
4.7
|
%
|
||||
|
Dividend
yield
|
0.0
|
%
|
0.0
|
%
|
||||
Winland
calculates the expected life of awards using historical data to estimate option
exercises and employee terminations. Expected volatility is based on
daily historical fluctuations of Winland’s common stock using the closing market
value for the number of days of the expected term immediately preceding the
grant. The risk-free interest rate is based on the U.S. Treasury
yield curve in effect at the time of the grant for a bond with a similar
term.
Winland
receives a tax deduction for certain stock option exercises and disqualifying
stock dispositions during the period the options are exercised or the stock is
sold, generally for the excess of the price at which the options are sold over
the exercise prices of the options. Prior to adoption of SFAS 123R,
all tax benefits resulting from the exercise of stock options were reported as
operating cash flows in the Statements of Cash Flows. In accordance
with SFAS 123R, Winland revised its Statements of Cash Flows presentation to
report any tax benefit from the exercise of stock options as financing cash
flows. For the years ended December 31, 2007 and 2006, there were
stock option exercises and disqualifying stock dispositions which triggered
$10,000 and $43,000 in tax benefits, therefore net cash provided by financing
activities was increased as a result of the adoption of SFAS 123R.
Net cash
proceeds from the exercise of stock options were $27,000 and $53,000 for the
years ended December 31, 2007 and 2006. For the years ended December 31, 2007
and 2006, 21,340 and 30,847 options were exercised in stock swaps, using
previously owned shares of Winland’s common stock as payment for the
shares.
Note
7. Warrants and Stock-Based Compensation Plans (Continued)
The
following table represents stock option activity for the twelve months ended
December 31, 2007 and 2006:
|
Number
of Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contract Life
|
|||||||
|
Outstanding
options at January 1, 2006
|
265,571
|
$
|
2.25
|
||||||
|
Granted
|
100,000
|
3.66
|
|||||||
|
Exercised
|
(78,235
|
)
|
1.49
|
||||||
|
Forfeited
|
(1,296
|
)
|
1.62
|
||||||
|
Outstanding
options at December 31, 2006
|
286,040
|
$
|
2.95
|
4.05
Yrs
|
|||||
|
Outstanding
options at January 1, 2007
|
286,040
|
$
|
2.95
|
||||||
|
Granted
|
156,000
|
2.88
|
|||||||
|
Exercised
|
(38,840
|
)
|
1.29
|
||||||
|
Forfeited
|
(32,100
|
)
|
2.92
|
||||||
|
Outstanding
options at December 31, 2007
|
371,100
|
$
|
3.10
|
4.95
Yrs
|
|||||
|
Outstanding
exercisable at December 31, 2007
|
163,540
|
$
|
3.22
|
4.01
Yrs
|
|||||
The
aggregate intrinsic value of options outstanding at December 31, 2007 and 2006
was $15,000 and $175,000, respectively. The aggregate intrinsic value
of options exercisable at December 31, 2007 and 2006 was $9,000 and $139,000,
respectively. Total intrinsic value of options exercised for the
twelve months ended December 31, 2007 and 2006 was $55,000 and $240,000,
respectively.
During
the years ended December 31, 2007 and 2006, Winland granted 156,000 and 100,000
options, respectively. These options had a weighted average grant
date fair value of $1.55 and $2.61 per share, respectively.
The
following table summarizes information about stock options outstanding at
December 31, 2007:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
|
Range
of Exercise Prices
|
Number
of Shares
|
Weighted-Average
Remaining Contractual Life (Years)
|
Weighted-Average
Exercise Price
|
Number
of Shares
|
Weighted-Average
Exercise Price
|
|||||||||||||||||
|
$
|
0.91
- $1.34
|
8,800
|
0.9
|
1.27
|
8,800
|
1.27
|
||||||||||||||||
|
$
|
1.80
- $2.24
|
27,000
|
5.8
|
2.11
|
-
|
-
|
||||||||||||||||
|
$
|
2.25
- $2.69
|
66,800
|
4.1
|
2.45
|
18,840
|
2.46
|
||||||||||||||||
|
$
|
2.70
- $3.13
|
61,500
|
1.3
|
2.90
|
54,300
|
2.89
|
||||||||||||||||
|
$
|
3.14
- $3.58
|
139,000
|
6.7
|
3.35
|
32,800
|
3.29
|
||||||||||||||||
|
$
|
3.59
- $4.03
|
24,000
|
4.6
|
3.62
|
4,800
|
3.62
|
||||||||||||||||
|
$
|
4.04
- $4.48
|
44,000
|
6.4
|
4.26
|
44,000
|
4.26
|
||||||||||||||||
|
371,100
|
5.0
|
$
|
3.10
|
163,540
|
$
|
3.22
|
||||||||||||||||
At
December 31, 2007, there was $226,000 of unrecognized compensation cost related
to share-based payments which is expected to be recognized over a
weighted-average period of 2.6 years.
Note
8. Employee Benefit Plans
Pension plan: Winland has a
qualified defined contribution 401(k) profit-sharing plan for its employees who
meet certain age and service requirements. Employees are allowed to make
contributions of up to 15 percent of their eligible compensation. The plan also
provides for a Company-sponsored match to be determined each year by the Board
of Directors. Winland contributed approximately $100,000 and $105,000 to the
plan for the years ended December 31, 2007 and 2006, respectively. In addition,
Winland may make additional discretionary contributions to the plan to the
extent authorized by the Board of Directors. There were no discretionary
contributions to the plan for the years ended December 31, 2007 and
2006.
Health Savings
Account: Winland has a health savings account plan for its
employees who meet certain service requirements. The plan provides
for Winland to make contributions equal to one-half the deductible limit elected
by the employee. The employee may also make contributions equal to
one-half the deductible limit elected. Winland makes contributions to
the plan on a quarterly basis on the first day of each quarter. The
contributions cannot be refunded to Winland if the employee’s employment with
Winland is terminated voluntarily or involuntarily. Winland
contributed approximately $209,000 and $193,000 to the plan for the year ended
December 31, 2007 and 2006, respectively.
Note
9. Major Customers, International Sales and Enterprisewide
Disclosures
Major customers: Winland has
customers which accounted for more than 10 percent of net sales for the years
ended December 31, 2007 and 2006, as follows:
|
2007
|
2006
|
|||||||
|
Sales
percentage:
|
||||||||
|
Customer
A
|
20
|
%
|
38
|
%
|
||||
|
Customer
B
|
19
|
%
|
19
|
%
|
||||
|
Customer
C
|
18
|
%
|
9
|
%
|
||||
|
Accounts
receivable percentage at December 31:
|
||||||||
|
Customer
A
|
10
|
%
|
7
|
%
|
||||
|
Customer
B
|
13
|
%
|
26
|
%
|
||||
|
Customer
C
|
39
|
%
|
17
|
%
|
||||
International
sales: Export sales to international customers for 2007 and
2006 were approximately $231,000 and $201,000, respectively. Accounts receivable
from international customers were approximately $17,000 and $7,000 at December
31, 2007 and 2006, respectively.
Enterprisewide
disclosures: The following table presents approximate revenues
from external customers for each of Winland’s groups of products and
services:
|
Years
Ended December 31
|
||||||||
|
2007
|
2006
|
|||||||
|
Electronic
controls and assemblies for OEM customers
|
$
|
29,004,000
|
$
|
33,842,000
|
||||
|
Proprietary
microprocessors and mechanically controlled sensors and
alarms
|
3,075,000
|
3,260,000
|
||||||
|
Raw
material and sub-assemblies for OEM customers
|
1,866,000
|
518,000
|
||||||
|
Engineering
and test design services
|
714,000
|
246,000
|
||||||
|
Freight
|
87,000
|
79,000
|
||||||
|
$
|
34,746,000
|
$
|
37,945,000
|
|||||
Note
10. Shareholder Rights Plan
On
December 9, 2003, Winland’s Board of Directors adopted a Shareholder Rights
Plan. Under the plan, rights were constructively distributed as a dividend at
the rate of one right for each share of common stock of Winland held by the
shareholders of record as of the close of business on December 31, 2003. Each
right entitles its holder to purchase one-hundredth of a share of Series A
Junior Participating Preferred Stock at an exercise price of $36. The rights
will only be exercisable if a person or group acquires, has the right to
acquire, or has commenced a tender offer for 15 percent or more of
Winland’s outstanding common stock. The rights are nonvoting, pay no dividends,
expire on December 9, 2013, and may be redeemed by Winland for $0.001 per right
at any time before the 15th day (subject to adjustment) after a 15 percent
position is acquired. The rights have no effect on earnings per share until they
become exercisable.
After the
rights are exercisable, if Winland is acquired in a merger or other business
combination, or if 50 percent or more of Winland’s assets are sold, each
right will entitle its holder (other than the acquiring person or group) to
purchase, at the then current exercise price, common stock of the acquiring
entity having a value of twice the exercise price. In connection with
the adoption of the Shareholder Rights Plan, the Board of Directors has
designated 60,000 shares of previously undesignated stock as Series A Junior
Participating Preferred Stock. The shares have a par value of $0.01 per share
and a liquidation value equal to the greater of $100 or 100 times the aggregate
amount to be distributed per share to holders of common stock. Shares of Series
A Junior Participating Preferred Stock are not convertible into shares of
Winland’s common stock. Each share of Series A Junior Participating Preferred
Stock will be entitled to a minimum preferential quarterly dividend payment
equal to the greater of $1 per share or an aggregate dividend of 100 times the
dividend declared per share of common stock. Each share of Series A Junior
Participating Preferred Stock has 100 votes. In the event of any merger,
consolidation or other transaction in which common stock is exchanged; each
share of Series A Junior Participating Preferred Stock will be entitled to
receive 100 times the amount received per share of common stock. There are no
shares of Series A Junior Participating Preferred Stock
outstanding.
Disclosure Controls
Our
Chief Executive Officer and Chief Financial Officer, referred to collectively
herein as the Certifying Officers, are responsible for establishing and
maintaining our disclosure controls and procedures. The Certifying Officers have
reviewed and evaluated the effectiveness of Winland’s disclosure controls and
procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated
under the Securities Exchange Act of 1934) as of December 31,
2007. Based on that review and evaluation, which included inquiries
made to certain other employees of Winland, the Certifying Officers have
concluded that Winland’s current disclosure controls and procedures, as designed
and implemented, are effective in ensuring that information relating to Winland
required to be disclosed in the reports that Winland files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms, including ensuring that such information is accumulated and
communicated to Winland’s management, including the Chief Executive Officer and
the Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
Management’s
Report on Internal Control over Financial Reporting
Winland’s
management is responsible for establishing and maintaining effective internal
control over financial reporting as defined in Rule 13a-15(f) of the Securities
Exchange Act of 1934. Winland’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Winland’s
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of Winland’s
assets; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that Winland’s receipts and
expenditures are being made only in accordance with authorizations of Winland’s
management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of Winland’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
has assessed Winland’s internal control over financial reporting in relation to
criteria described in Internal
Control – Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment using those
criteria, we concluded that, as of December 31, 2007, Winland’s internal control
over financial reporting was effective.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to the rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in this annual report.
Changes
in Internal Control.
None.
22
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
| WINLAND ELECTRONICS, INC. | |||
|
Date:
May 20, 2008
|
By:
|
/s/ Thomas J. de Petra | |
| Thomas J. de Petra | |||
| President and Chief Executive Officer | |||
23