UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________________
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, 2006
|
Commission
File No.: 1-15637
|
WINLAND
ELECTRONICS, INC.
(Name
of
small business issuer 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)
(507)
625-7231
(Issuer’s
telephone number)
________________________
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
________________________
Check
whether the Issuer is not required to file reports pursuant to Section
13 or
15(d) of the Exchange Act. o
Check
whether the Issuer (1) has filed all reports required to be filed by
Section 13
or 15(d) of the Exchange Act 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 þ
No
o
Check
if
there is no disclosure of delinquent filers in response 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. o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule
12b-2 of the Exchange Act).
Yes
o No
þ
Issuer’s
revenues for fiscal year ended December 31, 2006: $37,945,004
The
aggregate market value of the Common Stock held by non-affiliates as
of March
16, 2007 was approximately $11,121,997 based on the closing sale price
of the
Issuer’s Common Stock on such date.
There
were 3,600,856 shares of Common Stock, $.01 par value, outstanding as
of March
16, 2007.
________________________
DOCUMENTS
INCORPORATED BY REFERENCE
Documents
incorporated by reference pursuant to Rule 12b-23: Portions of the Company’s
Proxy Statement for its 2007 Annual Meeting are incorporated by reference
into
Part III.
Transitional
Small Business Disclosure Format (check one) Yes o
No
þ
2
ITEM
1. DESCRIPTION
OF BUSINESS
Winland
Electronics, Inc. (the “Company”) was incorporated as a Minnesota corporation in
October 1972. The Company designs and manufactures custom electronic
controls
and assemblies primarily for original equipment manufacturer (“OEM”) customers,
providing services from early concept studies through complete product
realization. Revenues from OEM customers provided 91.3% of the Company’s total
revenue in 2006. The Company continues to maintain a presence in the
security/industrial markets with the sales of its own line of proprietary
environmental security products, which accounted for 8.7% of the Company’s total
revenue in 2006.
PRODUCTS
The
Company designs, produces and distributes products in two product categories
defined as “Electronic Manufacturing Services (“EMS”) for OEM Customers” and
“Proprietary Products and Services,” primarily for the Security/Industrial
markets.
Electronic
Manufacturing Services for OEM Customers:
The
Company designs and manufactures circuit board assemblies and higher
level
products that incorporate them for many OEM customers. The Company is
positioned
to offer complete solutions to OEM customer needs by providing value-added
services that complement the Company’s contract manufacturing capabilities. The
services provided may include product concept studies, product design,
printed
circuit board design, design for manufacturing, higher level assembly
and box
build, and legacy support. These services differentiate the Company from
the
competition and increase customer satisfaction, confidence, and loyalty.
The
Company views EMS customers as strategic partners and works to provide
these
“partners” with high level customer care and technical services. Although the
Company has purchase orders in place from many of its OEM customers that
are
scheduled to be fulfilled in 2007, these customers may terminate their
relationship with the Company at any time, with certain cancellation
provisions.
Therefore, there is no assurance that the Company will continue to be
engaged by
any of these customers. Sales to OEM customers accounted for 91.3% and
89.9% of
the Company’s total net sales during 2006 and 2005, respectively.
Proprietary
Products:
The
Company’s proprietary products include an established family of environmental
security products that can monitor critical environments. The Company’s
security/industrial products include simple and sophisticated microprocessor
and
mechanically controlled sensors and alarms. These products monitor and
detect
critical environmental changes, such as changes in temperature or humidity,
water leakage and power failures. The Company’s “ALERT” series of products may
be connected to many burglar or fire alarm panels to monitor and report
unfavorable environmental conditions. Proprietary product sales accounted
for
8.7% and 10.1% of the Company’s total net sales for 2006 and 2005,
respectively.
Marketing
and Distribution:
The
Company markets its design and manufacturing services to prospective
OEM
customers primarily through direct sales and marketing efforts along
with a
referral network to promote its services and uncover new opportunities.
Management believes that a direct sales force augmented by a referral
network
strategy effectively provides Winland an opportunity to build market
share in
the EMS (Electronic Manufacturing Services) market. One of the Company’s key
marketing objectives is to form long-term business partnerships with
OEM
customers by working directly with the customer to develop a degree of
technological interdependence between the Company and the customer. With
this in
mind, the Company has worked to identify new OEM customers that need
a broad
range of services in addition to their manufacturing needs. The Company
plans to
achieve continued growth in OEM sales by providing its customers added
value
with a customer intimate strategy that is centered in exceptional service,
application specific technical expertise, and exceptional quality.
The
Company markets its proprietary products through dealers and wholesalers,
in-house direct marketing and sales efforts, instrumentation catalogs,
and
national and regional trade expositions. Currently, the Company sells
its
environmental security products through a distribution network of over
900
locations in the United States, Canada, Mexico, and Europe. The Company
continues to explore opportunities with its proprietary product lines,
to expand
into additional markets, as well as design new products.
Source
of Materials:
Raw
material components and some subassemblies are purchased from outside
vendors,
qualified through a vendor qualification process and inspected in accordance
with Company inspection policies before being incorporated into 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. If the Company loses one or more of its major components
suppliers, and needs to seek alternative 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, TEMP ALERT, ENVIRONMENTAL SECURITY and
ENVIROALERT.
Seasonality
and Working Capital:
Due
to
the diversity of the Company’s customer mix, the Company’s business and working
capital needs are not seasonal. Changes in the types of products produced
for
significant OEM customers could materially affect the seasonality of
the
Company’s business in future 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 the Company’s contract
manufacturing relationships, there is a significant degree of dependence
between
these customers and the Company. Net sales to Select Comfort Corporation
(Select) equaled $14.5 million, or 38.3% of total net sales in 2006 and
$15.9
million, or 52.1% of total net sales in 2005. Select is a Minnesota based
air-sleep system manufacturer in the bedding industry. Net sales to XATA
Corporation (XATA) equaled $7.2 million, or 18.9% of total net sales
in 2006 and
$1.5 million, or 4.9% of total net sales in 2005. XATA is a Minnesota
based
onboard fleet management solutions provider for the trucking industry.
No other
customer equaled or exceeded 10% of net sales for 2006 or 2005.
In
2006,
nearly 41.1% of all proprietary products sales were to one of the world’s
largest security products distributors.
Competition:
The
Company’s business includes the design and manufacturing of custom electronic
controls and assemblies for OEM customers and the development and marketing
of
proprietary security/industrial products. The competition for the contract
design and manufacturing services offered by the Company is very competitive,
both domestically and internationally. To enhance its ability to compete
effectively, the Company has continued to invest in the development of
its work
force and technically advanced design production and test equipment.
The Company
distinguishes itself from many competitors by offering full service solutions
to
its contract design and manufacture customers. Significant competitive
factors
in this market include development and design expertise, quality of
manufacturing, price, capacity, and company reputation. The Company believes
that it performs favorably with respect to these competitive factors
in the
markets it serves. The Company’s foreign competitors are often more aggressive
in pricing their services and many of the Company’s competitors have greater
capacity, and are better-known and better-financed than the
Company.
Competition
among the security/industrial products has increased the last several
years as
additional companies have introduced competing products. The Company
believes,
however, that its products offer desirable features at competitive prices.
Significant competitive factors in the market for security/industrial
products
include product effectiveness and features, price, reliability and company
reputation. The Company believes that it competes favorably with respect
to
product effectiveness, features, price and reliability. However, given
the
Company’s size and relatively small presence in this market, many of the
Company’s competitors have an advantage by being larger, better-known and
better-financed.
Research
and Development:
Throughout
2006, the Company has worked to provide full-service solutions to its
OEM
customers by offering varied design technologies such as wireless communications
and embedded software design for control systems. The Company’s engineering
department is staffed with experienced electrical and software engineers
that
provide a wide range of customer services, including: conceptual design;
custom
enclosures and 3D modeling; board level, subsystem, and high-level assembly;
PCB
layout; analog and digital design, embedded systems and software; sensors,
power
and motor controls, and low power radio frequency design. The Company
believes
that with its internal engineering department and approved outside engineering
consultants it will be able to meet the current needs of its customer
base. The
Company spent $642,330 or 1.7% of net sales for research and development
expenses for the year ended December 31, 2006, compared to $798,138 or
2.6% of
net sales for 2005.
Effect
on Environmental Regulations:
There
are
two European Union (“EU”) directives which could affect our business and
results. The Restriction of the use of Certain Hazardous Substances (“RoHS”)
became effective on July 1, 2006, and restricts within the EU the
distribution of products containing certain substances, including lead,
which is
the most relevant restricted substance to the Company.
The
second EU directive is the Waste Electrical and Electronic Equipment
directive,
effective in August 2005, under which a manufacturer or importer will be
required, at its own cost, to take back and recycle all of the products
it
either manufactured in or imported into the EU.
Since
both of these directives affect the worldwide electronics supply-chain,
we have
made collaborative efforts with our suppliers and customers to develop
compliant
processes and products. The continued cost of such efforts, the degree
to which
we will be expected to absorb such costs, the impact that the directive
may have
on product shipments and our liability for non-compliant product is not
yet
known, but could have a material effect on our operations and
results.
Evaluations
of controls required by Section 404 of the Sarbanes-Oxley
Act:
Changing
laws, regulations and standards relating to corporate governance and
public
disclosure, including the Sarbanes-Oxley Act and related regulations
implemented
by the SEC, are creating uncertainty for public companies, increasing
legal and
financial compliance costs and making some activities more time consuming.
We
will be evaluating our internal controls systems to allow management
to report
on, and our independent auditors to attest to, our internal controls.
We will be
performing the system and process evaluation and testing (and any necessary
remediation) required to comply with the management certification and
auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act. While we
anticipate being able to fully implement the requirements relating to
internal
controls and all other aspects of Section 404 by our December 31, 2007
deadline, we cannot be certain as to the timing of completion of our
evaluation,
testing and remediation actions or the impact of the same on our operations.
If
we are not able to implement the requirements of Section 404 in a timely
manner or with adequate compliance, we may be subject to sanctions or
investigation by regulatory authorities, including the SEC. This type
of action
could adversely affect our financial results or investors’ confidence in our
company and our ability to access capital markets and could cause our
stock
price to decline. In addition, the controls and procedures that we will
implement may not comply with all of the relevant rules and regulations
of the
SEC. If we fail to develop and maintain effective controls and procedures,
we
may be unable to provide the required financial information in a timely
and
reliable manner. Further, if we acquire any company in the future, we
may incur
substantial additional costs to bring the acquired company’s systems into
compliance with Section 404.
Foreign
Operations and Export Sales:
The
Company derived less than 1% of its revenues from sales outside the United
States for both 2006 and 2005.
Personnel:
At
December 31, 2006, the Company had 143 employees (138 full-time and 5
part-time). During 2006 and 2005, the Company also used temporary labor
services
during peak production times. The Company is not subject to a collective
bargaining agreement, and it considers its relations with its employees
to be
good.
The
Company owns its office and manufacturing facility located in Mankato,
Minnesota. The 58,000 square foot building consists of 15,500 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. Management believes
the
current facility adequately supports the Company’s present and near future
operations. Management believes its property is adequately covered by
insurance.
The Company’s office and manufacturing facility is subject to mortgages with an
aggregate debt of $826,394 as of December 31, 2006.
None.
None.
The
name
and ages of all of the Company’s executive officers and the positions held by
them are listed below.
|
Name
|
Age
|
Position
|
|
Lorin
E. Krueger
|
51
|
President,
Chief Executive Officer,
|
|
|
Secretary
and Director
|
|
|
|
|
|
|
Glenn
A. Kermes
|
46
|
Chief
Financial Officer
|
|
|
|
|
|
Terry
E. Treanor
|
44
|
Vice
President of Manufacturing
|
|
|
|
|
|
Dale
A. Nordquist
|
52
|
Senior
Vice President of Sales and Marketing
|
|
|
|
|
|
Gregory
W. Burneske
|
45
|
Vice
President of Engineering
|
Lorin
E. Krueger
has
served as our Chief Executive Officer since June 2001 and as our President
since
January 1999. In addition, Mr. Krueger has served as Secretary since
1983. Mr.
Krueger, who has been an employee of the Company since 1976, served in
several
other positions, including Chief Operating Officer from January 1999
until June
2001, Senior Vice President of Operations from March 1987 until January
1999,
and Vice President from January 1977 to March 1987.
Glenn
A. Kermes
has
served as our Chief Financial Officer since October 2006. From September
2004 to
June 2006, Mr. Kermes served as Vice President and Chief Financial Officer
of
Ross Manufacturing, a manufacturer of frozen dessert equipment. From
January
2004 to September 2004, Mr. Kermes served as North American Controller
for the
Kendro Division of SPX Corporation. Mr. Kermes served as Operations Controller
for the Newell Rubbermaid Hand Tools Division from July 2002 to January
2004.
Prior to that, he served in several other financial positions.
Terry
E. Treanor
has
served as our Vice President of Manufacturing since June 1996. He joined
the
Company in 1994 serving in various capacities, including Quality Assurance
Manager and Operations Manager. Mr. Treanor was employed by Onan Corp.,
a power
generation company, from January 1985 until July 1994, serving most recently
as
Supplier Quality Engineer.
Dale
A. Nordquist
has
served as our Senior Vice President of Sales and Marketing since December
2002.
From October 2001 to December 2002, Mr. Nordquist was our Vice President
of
Sales - EMS Western Region. From May 1999 to October 2001, Mr. Nordquist
served
as Vice President of Sales and Marketing for Quickdraw Conveyor Systems,
Inc.,
which filed for Chapter 7 bankruptcy in January 2001 and was acquired
by MagStar
Technologies, Inc. in February 2001. From 1981 to May 1999, Mr. Nordquist
served
as Vice President of Sales and Marketing for HEI, Inc., a Minnesota based
designer and manufacturer of ultra-miniature electronic devices and high
technology products incorporating these devices.
Gregory
W. Burneske
has
served as our Vice President of Engineering since January 2006. In May
2004, Mr. Burneske joined Winland as our Director of Engineering
Services. From 1989 to May 2004, Mr. Burneske was employed by Plexus
Technology Group, Inc. in various positions, including design engineer,
a
project manager and as the manager of analog and RF systems
development.
AND
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
The
Company’s Common Stock is listed on the American Stock Exchange (“AMEX”) under
the symbol WEX. The following table sets forth the high and the low bid
quotations, as reported by AMEX.
|
Fiscal
Year Ended December 31, 2006
|
Low
|
High
|
|
First
Quarter
|
3.37
|
5.75
|
|
Second
Quarter
|
2.95
|
7.19
|
|
Third
Quarter
|
3.25
|
3.90
|
|
Fourth
Quarter
|
3.02
|
4.19
|
|
Fiscal
Year Ended December 31, 2005
|
||
|
First
Quarter
|
3.95
|
5.19
|
|
Second
Quarter
|
3.11
|
5.09
|
|
Third
Quarter
|
3.20
|
7.44
|
|
Fourth
Quarter
|
3.15
|
5.43
|
On
March
16, 2007, the fair market value of the Company’s Common Stock was $3.33 based on
the closing sale price quoted by AMEX on that date. As of December 31,
2006, the
Company had approximately 397 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, restrictive debt covenants and
such
other factors as are deemed relevant by the Board of Directors. There
were no
dividends paid on Common Stock during 2006.
RESULTS
OF OPERATIONS - 2006 vs. 2005
Net
Sales: The Company recorded net sales of $37,945,004 for the year ended
December 31, 2006, an increase of $7,512,044 or 24.7% from $30,432,960
for 2005.
Nine new OEM customers provided 19.5% of this increase along with increased
net
sales to several long term customers. The increase in net sales to OEM
customers
was offset, in part, by a 8.3% reduction in net sales to Select Comfort.
The
Company was successful in introducing 164 new or revised line items for new
and existing customers. Sales of Winland’s proprietary products, primarily the
security/industrial sector increased 6.5% to $3,286,980 for 2006 compared
to
$3,086,555 for 2005. As a percentage of total sales, proprietary product
sales
were 8.7% and 10.1% for the twelve months ended December 31, 2006 and
2005,
respectively.
The
Company’s Original Equipment Manufacture (OEM) customers have given the Company
purchase orders and forecasts having an aggregate value of $19.6 million
to be
completed during 2007. The Company expects to receive additional orders
from
current OEM customers for 2007 and future production. Although the Company
has
purchase orders in place from many of its OEM customers, which are scheduled
to
be fulfilled in 2007, these customers may terminate their relationship
with the
Company at any time, with certain cancellation provisions. Therefore,
there is
no assurance that the Company will continue to be engaged by any of these
customers.
On
March
20, 2006, the Company entered into a new agreement with Select Comfort,
its
largest customer, which replaced a prior agreement with Select Comfort
that
granted the Company exclusive rights within the U.S. to supply certain
products
to Select Comfort. Under the terms of the new agreement, the Company
has revised
the pricing of the products it manufactures for Select Comfort and the
new
pricing represents a lower overall margin contribution to the Company.
Under the
new agreement, the Company will be one of two suppliers of electronic
assemblies
to Select Comfort and expects to receive approximately 50 percent of
Select
Comfort’s total electronics assembly demand. The new agreement calls for
periodic performance reviews for quality, delivery and price.
The
Company has continued to provide a full range of Electronic Manufacturing
Services (EMS) to OEM customers, delivering product needs from early
concept
through product realization. The Company continues to explore additional
geographic regions to market its OEM services, primarily through networking
with
referral sources in the Chicago and Minneapolis areas. The loss of any
significant OEM customer would likely have an adverse effect on the Company’s
short-term, and potentially long-term, results.
Cost
of Sales:
Cost of
sales was $31,439,758 or 82.9% of net sales for year ended December 31,
2006,
compared to $23,134,362 or 76.0% of net sales for the same period in
2005. The
Company includes material and supplies, direct labor and other manufacturing
expenses in its computation of cost of sales. Other manufacturing expenses,
some
of which are included in overhead, include, but are not limited to, indirect
manufacturing labor and related benefits and expenses, depreciation and
maintenance of manufacturing equipment and software, freight expense,
purchasing
expenses, warehousing expenses, warranty expense, inventory scrap and
write-offs, an allocation for facility and information technology usage
and
product liability insurance.
Costs
that are capitalized in work in process and finished goods inventory
include all
of the above, except certain expenses such as warranty expense, inventory
scrap
and write-offs and certain freight costs.
Gross
Profits:
Gross
profits can fluctuate from period to period due to a variety of factors,
including, but not limited to, sales volume, product mix, and plant efficiency.
Gross profit was $6,505,246 or 17.1% of net sales for the year ended
December
31, 2006 compared to $7,298,598 or 24.0% of net sales for the same period
in
2005. Gross profit dollars decreased 10.9% for 2006 compared to 2005.
The
decrease in gross profit as a percentage of sales is attributable to
reduced
margins on Select Comfort sales due to adjusted pricing with the new
agreement, continued margin pressure from other customers on existing
products
and costs of introducing new or revised products to manufacturing. In
addition,
gross profits decreased due to increases in indirect personnel expenses
of
$388,752, research & development application of $333,423 for specific jobs,
depreciation expenses of $199,685 and plant re-layout expenses of $121,120,
offset, in part, by decreases in employee training of $31,811 and prototype
supplies of $26,178.
Operating
Expenses:
Operating expenses were $4,758,916 or 12.5% of net sales for the year
ended
December 31, 2006 compared to $4,079,049 or 13.4% for the same period
ended
December 31, 2005. Operating expenses include: 1) general and administrative
expenses such as administrative salaries and related benefits and expenses,
professional and legal fees, investor relations expenses, board of directors
fees, and directors and officers insurance and other general office supplies
and
expenses; 2) sales and marketing expenses including salaries and related
benefits and expenses for direct outside salesmen, program management,
customer
service and the senior vice president of sales and marketing, sales commissions,
trade show expenses, web site development and maintenance, promotional
materials, advertising expense and an allocation for facility and information
technology usage; and 3) research and development expense such as salaries
and
related benefits and expenses, labor and material associated with new
product
development, depreciation and maintenance of research and development
equipment
and software, warranty expense associated with engineering projects and
an
allocation of facility and information technology usage.
General
and administrative expenses were $2,479,584 or 6.5% of net sales for
the year
ended December 31, 2006 compared to $1,901,478 or 6.2% of net sales for
the same
period in 2005. The increase in general and administrative expense for
the year
ended December 31, 2006 is attributed to increased professional fees
of
$270,574, personnel expenses of $152,539, board of directors expense
of $68,495,
telephone expense of $19,389 offset in part by declines in investor relations
expense of $41,932 and a $22,192 reduction in bad debt write offs. Of
the
significant increase in professional fees, $89,099 relates to consulting
services to aid developing and documenting the Company’s internal control
documentation for compliance with Sarbanes-Oxley Section 404. The Company
spent
$51,153 on its executive search for a CFO while $40,488 was spent for
consultants who aided in developing strategic initiatives for the Company
and
$40,000 for merger and acquisition initiatives.
Sales
and
marketing expenses (including project management) were $1,637,002 or
4.3% of net
sales for the year ended December 31, 2006 compared to $1,379,433 or
4.5% of net
sales for the same period in 2005. The increase in sales and marketing
expense
for the year ended December 31, 2006 is attributed to increased personnel
expenses of $198,750, promotional and trade show expenses of $44,839,
travel
expenses of $22,666, and professional search fees of $17,745 offset in
part by
declines in employee training of $10,903 and advertising expenses of
$10,652.
Research
and development expenses (including the development of new Company products
as
well as design services and support to the OEM customer base) were $642,330
or
1.7% of net sales for year ended December 31, 2006, compared to $798,138
or 2.6%
of net sales for the same period in 2005. For the twelve months ended
December
31, 2006, the Company’s customers had increased research and development
projects. Labor cost of $333,423 for these projects was transferred to
Engineering Cost of Goods Sold and included in total Cost of Sales shown
above.
This transfer in COGS was offset in part by increased research and development
expenses of $115,733, personnel expenses of $107,232 and professional
search
fees of $19,500.
Interest
Expense: Interest
expense was $187,570 or 0.5% of net sales and $124,485 or 0.4% of net
sales for
the year ended December 31, 2006 and 2005, respectively. During 2006,
the
Company paid down $586,852 of long-term debt, added new long term debt
of
$957,317 and had outstanding balances on its revolving credit
agreement.
Net
Income:
The
Company reported net income of $1,038,096 or $0.29 per basic share and
$0.28 per
diluted share for the year ended December 31, 2006, compared to net income
of
$2,049,356 or $0.59 per basic share and $0.57 per diluted share for the
same
period in 2005.
The
Company believes inflation has not significantly affected its results
of
operations.
The
Company experienced an effective 34% blended federal and state income
tax rate
for 2006 and 35% for 2005. Year-to-date pre-tax income was $1,568,096
for 2006
and $3,132,356 for 2005, resulting in income tax expense of $530,000
for 2006
and $1,083,000 for 2005.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
used
by operating activities was $1,556,388 for 2006 compared to cash provided
of
$1,825,956 for 2005, a decrease of $3,382,344. This change was due to
increased
inventory levels and higher accounts receivable balances offset by increased
accounts payable balances. Investing activities used $715,127 cash to
purchase
property and equipment. Cash provided by financing activities included
$1,924,000 from borrowings on the Company’s revolving credit agreement, $76,012
from the issuance of common stock and $43,672 from disqualifying dispositions
of
stock options. The company used $586,852 to pay down its long-term
borrowings.
The
current ratio was 2.1 to 1 at December 31, 2006 and 3.0 to 1 at December
31,
2005. Working capital equaled $6,707,813 on December 31, 2006, compared
to
$5,992,118 on December 31, 2005. The increase in working capital is attributed
to increases in accounts receivable balances and inventory levels offset
by
increases in accounts payable balances and the outstanding revolving
credit
agreement balance.
On
June
28, 2006 the Company extended its revolving credit agreement with the
M&I
Bank of Minneapolis, Minnesota to June 29, 2007. Advances totaling $1,924,000
were outstanding on the revolving line-of-credit agreement at December
31, 2006
with no advances outstanding at December 31, 2005. The agreement with
M&I
Bank is also subject to certain restrictive requirements. At December
31, 2006,
$2,076,000 was available for borrowing under the terms of this
agreement.
Management
believes that our cash balance, availability of funds under the line
of credit
agreement with M&I Bank, and anticipated cash flows from operations will be
adequate to fund our cash requirements for investing and financing activities
during the next twelve months.
A
summary
of our contractual cash obligations at December 31, 2006 is approximately
as
follows:
|
|
Payments
due by year
|
||||||||||||||||||
|
Contractual
Obligations
|
Total
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
and thereafter
|
||||||||
|
Long-term
debt, including interest
|
$
|
1,734,000
|
$
|
539,000
|
$
|
354,000
|
$
|
189,000
|
$
|
136,000
|
$
|
516,000
|
|||||||
|
Capital
leases, including interest
|
1,086,000
|
233,000
|
232,000
|
232,000
|
232,000
|
157,000
|
|||||||||||||
|
Total
|
$
|
2,820,000
|
$
|
772,000
|
$
|
586,000
|
$
|
421,000
|
$
|
368,000
|
$
|
673,000
|
|||||||
We
also
have a commercial commitment as described below:
|
Other
Commercial Commitment
|
Total
Amount Committed
|
Outstanding
at December 31, 2006
|
Date
of Expiration
|
|
Line
of credit
|
$4,000,000
|
$1,924,000
|
June
29, 2007
|
CRITICAL
ACCOUNTING POLICIES AND 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. We cannot assure you that actual results will not
differ
from those estimates. We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation
of
our financial statements.
Revenue
Recognition. In
most
cases, the Company recognizes revenue 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, the Company recognizes revenue from the sale of
customized
products when the product is delivered to a customer warehouse location
within
the Company, 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. We are
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 the Company by 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 the Company’s business involves the Company shipping product to a
primary customer’s location where it is held in a separate warehouse. Revenue is
recognized when that customer notifies the Company that the inventory
has been
removed from the warehouse and title to the product is transferred.
Revenue
recognition occurs for engineering design services as the progress billings
are
made and at the conclusion of the project.
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, the Company uses either a binding purchase order or customer
accepted and signed engineering quote as evidence of the arrangement.
The
Company does not generally accept returns but does provide a limited
warranty as
outlined below under Allowance for Rework and Warranty Costs.
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 using the last received cost. The
Company
makes provisions for slow moving, estimated excess and obsolete inventory
based
on an analysis of the existing inventory, and specific identification
of
obsolete inventory. The Company 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 at
$189,900 as of December 31, 2006 and $191,900 as of December 31,
2005.
In
addition to the above methodology, we have developed procedures that
will
provide for estimated excess, slow moving and obsolete inventory reserves
based
on quarterly reviews for our 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.
Allowance
for Doubtful Accounts.
We
evaluate our allowance for uncollectible accounts on a quarterly basis
and
review any significant customers with delinquent balances to determine
future
collectibles. We base our determinations on legal issues (such as bankruptcy
status), past history, current financial and credit agency reports, and
experience. We reserve accounts deemed to be uncollectible in the quarter
in
which we make the determination. We maintain additional reserves based
on our
historical bad debt experience. We believe these values are estimates
and may
differ from actual results. We believe that, based on past history and
credit
policies, the net accounts receivable are of good quality. Write offs
for the
year ended December 31, 2006 and 2005 were $0 and $22,099 respectively.
The
Allowance for Doubtful Accounts was valued at $20,000 at December 31,
2006 and
2005.
Allowance
for Rework and Warranty Costs. We
have
established a warranty reserve for rework, product warranties and customer
refunds. We provide a limited warranty to our 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, we provide a limited warranty
for our
proprietary products for a period of one year, which requires us 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 a percentage
of
sales for the prior twelve-month period. Any specific known warranty
issues are
reserved for individually. The total of these is analyzed to determine
the
probability and the Company’s financial exposure, and the reserve is
established. The allowance for rework and warranty costs was valued at
$126,110
as of December 31, 2006, which includes an allowance of $20,410 for the
EnviroAlert product enhancement and $117,300 as of December 31, 2005.
The
product warranty liability reflects management’s best estimate of probable
liability under our product warranties and may differ from actual
results.
Deferred
Taxes.
At
December 31, 2006, the financial statements reflect current deferred
tax assets
of $278,000 and long-term deferred tax liabilities of $255,000. Deferred
taxes
are provided on an asset and liability method, whereby deferred tax assets
are
recognized for deductible temporary differences and operating loss and
tax
credit carry-forwards, and deferred tax liabilities are recognized for
taxable
temporary differences. Temporary differences are the differences between
the
reported amounts of assets and liabilities and their tax basis. Deferred
tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax
assets
will not be realized. Realization of deferred tax assets is dependent
on future
taxable income during the period that deductible temporary differences
and
carry-forwards are to be available to reduce taxable income.
Stock
Based Compensation.
As of
December 31, 2006, the Company 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 using the 1997 Stock Option Plan. Effective
January 1, 2006, the Company began accounting for these plans using the
fair
value recognition provisions of Statement of Financial Accounting Standards
No.
123 (revised 2004), “Share-Based Payment” (SFAS123R), using the
modified-prospective-transition method. The effect of using SFAS 123R
was to
decrease income before taxes and net income by $137,043 for the year
ended
December 31, 2006. We use the Black Scholes option pricing model to estimate
the
fair value of stock based awards. The Company uses historical data to
estimate
option exercises and employee terminations used in the model. Expected
volatility is based on daily historical fluctuations of the Company’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.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
July
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in
Income Taxes - an Interpretation of FASB Statement 109 ("FIN 48"), which
clarifies the accounting for uncertainty in tax positions. This interpretation
provides that the tax effects from an uncertain tax position can be recognized
in financial statements, only if the position is more likely than not
of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective as of the beginning of fiscal 2007,
with the
cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. We are currently evaluating
the impact,
if any, FIN 48 may have on our financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
No. 157). SFAS No. 157 establishes a common definition for fair value
to be
applied to US GAAP guidance requiring use of fair value, establishes
a framework
for measuring fair value, and expands disclosure about such fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company is currently assessing the impact of SFAS
No. 157
on its financial position and results of operations.
CAUTIONARY
STATEMENTS
Certain
statements contained in this Annual Report on Form 10-KSB and other written
and
oral statements made from time to time by the Company do not relate strictly
to
historical or current facts. As such, they are considered “forward-looking
statements” that provide current expectations or forecasts of future events.
Such statements can be identified by the use of terminology such as
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,”
“possible,” “plan,” “project,” “should,” “will,” “forecast” and similar words or
expressions. The Company’s forward-looking statements generally relate to the
Company’s purchase order levels, building market share in the EMS market, growth
strategies, financial results, product development, sales efforts and
sufficiency of capital. One must carefully consider forward-looking statements
and understand that such statements involve a variety of risks and
uncertainties, known and unknown, and may be affected by inaccurate assumptions,
including, among others, those discussed below. Consequently, no forward-looking
statement can be guaranteed, and actual results may vary materially from
results
or circumstances described in such forward-looking statements. As provided
for
under the Private Securities Litigation Reform Act of 1995, the Company
wishes
to caution investors that the following important factors, among others,
in some
cases have affected and in the future could affect the Company’s actual results
of operations and cause such results to differ materially from those
anticipated
in forward-looking statements made in this document and elsewhere by
or on
behalf of the Company.
The
Company derives a significant portion of its revenues from a small number
of
major OEM customers that are not subject to any long-term contracts with
the
Company. If any major customers should for any reason decrease the volume
of
their business or stop doing business with the Company, the Company’s business
would be adversely affected. Some of the Company’s customers are not large
well-established companies, and the business of each customer is subject
to
various risks such as market acceptance of new products and continuing
availability of financing. To the extent that the Company’s customers encounter
difficulties or the Company is unable to meet the demands of its OEM
customers,
the Company could be adversely affected.
The
Company’s ability to increase revenues and profits is dependent upon its ability
to retain valued existing customers and obtain new customers that fit
its
customer profile. The Company competes for new customers with numerous
independent contract design and manufacturing firms in the United States
and
abroad, many of whom have greater financial resources and more established
reputations. The Company’s ability to compete successfully in this industry
depends, in part, upon the price at which the Company is willing to manufacture
a proposed product and the quality of the Company’s design and manufacturing
services. There is no assurance that the Company will be able to continue
to
obtain contracts from existing and new customers on financially advantageous
terms, and the failure to do so could prevent the Company from achieving
the
growth it anticipates.
The
Company’s ability to execute its initiatives to increase sales and expand market
share depends upon its ability to develop additional value added capabilities
and/or proprietary products and technologies and on the availability
of
sufficient financing, both equity and debt, to meet fixed and variable
costs
associated with such growth. In the current economic environment, banks
and
other sources of financing are conservative in their lending and investment
policies. There is no assurance that the Company will be able to obtain
the
financing necessary to achieve its goals.
The
Company’s success in providing an improved mix of higher margin products and
services depends on the effectiveness of its new product development
and
planning efforts as well as the timing of such and the availability and
costs of
any competing products or services on the market.
The
Company’s ability to comply with European Union directives RoHS and WEEE depends
upon its ability to develop and implement compliant processes and products.
The
continued cost of such efforts, the degree to which the Company will
be expected
to absorb such costs and liability for non-compliant product could adversely
affect the Company’s financial results.
The
following financial statements are at the pages set forth below:
|
17
|
|
|
|
|
|
18-19
|
|
|
|
|
|
20
|
|
|
|
|
|
21
|
|
|
|
|
|
22
|
|
|
|
|
|
23-35
|
To
the
Board of Directors
Winland
Electronics, Inc.
Mankato,
Minnesota
We
have
audited the accompanying balance sheets of Winland Electronics, Inc.
as of
December 31, 2006 and 2005, 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 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, 2006 and 2005, 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
discussed in Note 7 to the financial statements, the Company adopted
Statements
of Financial Accounting Standards No. 123(R), “Share-Based Payments” in
2006.
Minneapolis,
Minnesota
March
27,
2007
|
Winland
Electronics, Inc.
|
|||||||
|
December
31, 2006 and 2005
|
|||||||
|
Assets
(Note 3)
|
2006
|
2005
|
|||||
|
Current
Assets
|
|||||||
|
Cash
|
$
|
50,498
|
$
|
865,181
|
|||
|
Accounts
receivable, less allowance for doubtful accounts of $20,000
(Note
9)
|
5,165,014
|
4,033,241
|
|||||
|
Refundable
income taxes
|
237,154
|
48,298
|
|||||
|
Inventories
(Note 2)
|
6,994,497
|
3,523,489
|
|||||
|
Prepaid
expenses and other assets
|
359,735
|
311,240
|
|||||
|
Deferred
income taxes (Note 6)
|
278,000
|
236,500
|
|||||
|
Total
current assets
|
13,084,898
|
9,017,949
|
|||||
|
Other
Assets
|
|||||||
|
Patents
and trademarks, net of accumulated amortization of $34,493
in 2006;
$34,204 in 2005
|
3,463
|
1,408
|
|||||
|
Property
and Equipment, at cost (Notes 3 and 4)
|
|||||||
|
Land
and land improvements
|
382,901
|
272,901
|
|||||
|
Building
|
3,047,908
|
3,040,435
|
|||||
|
Machinery
and equipment
|
6,862,761
|
5,537,094
|
|||||
|
Data
processing equipment
|
1,003,205
|
1,205,585
|
|||||
|
Office
furniture and equipment
|
457,360
|
412,219
|
|||||
|
Total
property and equipment
|
11,754,135
|
10,468,234
|
|||||
|
Less
accumulated depreciation
|
5,975,111
|
5,540,097
|
|||||
|
Net
property and equipment
|
5,779,024
|
4,928,137
|
|||||
|
Total
assets
|
$
|
18,867,385
|
$
|
13,947,494
|
|||
|
See
Notes to Financial Statements.
|
|||||||
|
Winland
Electronics, Inc.
|
|||||||
|
Balance
Sheets
|
|||||||
|
December
31, 2006 and 2005
|
|||||||
|
Liabilities
and Stockholders’ Equity
|
2006
|
2005
|
|||||
|
Current
Liabilities
|
|||||||
|
Revolving
credit agreement (Note 3)
|
$
|
1,924,000
|
$
|
-
|
|||
|
Current
maturities of long-term debt
|
627,290
|
537,537
|
|||||
|
Accounts
payable
|
2,829,700
|
1,486,998
|
|||||
|
Accrued
expenses:
|
|||||||
|
Compensation
|
673,090
|
801,116
|
|||||
|
Other
|
323,005
|
200,180
|
|||||
|
Total
current liabilities
|
6,377,085
|
3,025,831
|
|||||
|
Long-Term
Liabilities
|
|||||||
|
Deferred
income taxes (Note 6)
|
255,000
|
261,900
|
|||||
|
Deferred
revenue (Note 5)
|
146,398
|
154,539
|
|||||
|
Long-term
debt, less current maturities (Notes 3 and 4)
|
1,705,576
|
1,424,863
|
|||||
|
Total
long-term liabilities
|
2,106,974
|
1,841,302
|
|||||
|
|
|||||||
|
Total
liabilities
|
8,484,059
|
4,867,133
|
|||||
|
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
|
|||||||
|
3,599,856
shares in 2006 and 3,527,915 shares in 2005
|
35,999
|
35,279
|
|||||
|
Additional
paid-in capital
|
4,429,184
|
4,165,035
|
|||||
|
Retained
earnings
|
5,918,143
|
4,880,047
|
|||||
|
Total
stockholders’ equity
|
10,383,326
|
9,080,361
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
18,867,385
|
$
|
13,947,494
|
|||
|
See
Notes to Financial Statements.
|
|||||||
|
Winland
Electronics, Inc.
|
|||||||
|
Years
Ended December 31, 2006 and 2005
|
|||||||
|
2006
|
2005
|
||||||
|
Net
sales (Note 9)
|
$
|
37,945,004
|
$
|
30,432,960
|
|||
|
Cost
of sales
|
31,439,758
|
23,134,362
|
|||||
|
Gross
profit
|
6,505,246
|
7,298,598
|
|||||
|
Operating
expenses:
|
|||||||
|
General
and administrative
|
2,479,584
|
1,901,478
|
|||||
|
Sales
and marketing
|
1,637,002
|
1,379,433
|
|||||
|
Research
and development
|
642,330
|
798,138
|
|||||
|
4,758,916
|
4,079,049
|
||||||
|
Operating
income
|
1,746,330
|
3,219,549
|
|||||
|
Other
income (expenses):
|
|||||||
|
Interest
expense
|
(187,570
|
)
|
(124,485
|
)
|
|||
|
Other,
net
|
9,336
|
37,292
|
|||||
|
(178,234
|
)
|
(87,193
|
)
|
||||
|
Income
before income taxes
|
1,568,096
|
3,132,356
|
|||||
|
Income
tax expense (Note 6)
|
530,000
|
1,083,000
|
|||||
|
Net
income
|
$
|
1,038,096
|
$
|
2,049,356
|
|||
|
Earnings
per common share data:
|
|||||||
|
Basic
|
$
|
0.29
|
$
|
0.59
|
|||
|
Diluted
|
$
|
0.28
|
$
|
0.57
|
|||
|
Weighted-average
number of common shares outstanding:
|
|||||||
|
Basic
|
3,553,062
|
3,491,227
|
|||||
|
Diluted
|
3,653,891
|
3,626,717
|
|||||
|
See
Notes to Financial Statements.
|
|||||||
|
Winland
Electronics, Inc.
|
||||||||||||||||
|
Years
Ended December 31, 2006 and 2005
|
||||||||||||||||
|
|
Additional
|
|||||||||||||||
|
|
Common
Stock
|
Paid-In
|
Retained
|
|||||||||||||
|
|
Shares
|
Amount
|
Capital
|
Earnings
|
Total
|
|||||||||||
|
Balance
on December 31, 2004
|
3,423,901
|
$
|
34,239
|
$
|
3,989,425
|
$
|
2,830,691
|
$
|
6,854,355
|
|||||||
|
Issuance
of common stock in accordance with
|
||||||||||||||||
|
employee
stock purchase plan (Note 7)
|
5,566
|
56
|
16,296
|
-
|
16,352
|
|||||||||||
|
Issuance
of common stock in accordance with
|
||||||||||||||||
|
employee
stock option plan (Note 7)
|
58,751
|
587
|
48,795
|
-
|
49,382
|
|||||||||||
|
Issuance
of common stock in accordance with
|
||||||||||||||||
|
exercise
of Warrants (Note 7)
|
39,697
|
397
|
73,042
|
-
|
73,439
|
|||||||||||
|
Warrants
issued for services (Note 7)
|
-
|
-
|
37,477
|
-
|
37,477
|
|||||||||||
|
Net
income
|
-
|
-
|
-
|
2,049,356
|
2,049,356
|
|||||||||||
|
Balance
on December 31, 2005
|
3,527,915
|
35,279
|
4,165,035
|
4,880,047
|
9,080,361
|
|||||||||||
|
Issuance
of common stock in accordance with
|
||||||||||||||||
|
employee
stock option and employee
|
||||||||||||||||
|
stock
purchase plans (Notes 7)
|
71,941
|
720
|
75,292
|
-
|
76,012
|
|||||||||||
|
Additional
Paid-In Capital in accordance with
|
||||||||||||||||
|
expensing
of employee stock purchase plan
|
||||||||||||||||
|
and
employee stock option plan
|
-
|
-
|
137,043
|
-
|
137,043
|
|||||||||||
|
Issuance
of common stock in accordance with
|
||||||||||||||||
|
exercise
of Warrants (Note 7)
|
-
|
-
|
8,142
|
-
|
8,142
|
|||||||||||
|
Tax
benefit from options exercised (Note 7)
|
-
|
-
|
43,672
|
-
|
43,672
|
|||||||||||
|
Net
income
|
-
|
-
|
-
|
1,038,096
|
1,038,096
|
|||||||||||
|
Balance
on December 31, 2006
|
3,599,856
|
$
|
35,999
|
$
|
4,429,184
|
$
|
5,918,143
|
$
|
10,383,326
|
|||||||
|
See
Notes to Financial Statements.
|
||||||||||||||||
|
Winland
Electronics, Inc.
|
|||||||
|
Years
Ended December 31, 2006 and 2005
|
|||||||
|
2006
|
2005
|
||||||
|
Cash
Flows From Operating Activities
|
|||||||
|
Net
income
|
$
|
1,038,096
|
$
|
2,049,356
|
|||
|
Adjustments
to reconcile net income to net cash provided by (used in)
operating
activities:
|
|||||||
|
Depreciation
and amortization
|
812,121
|
583,823
|
|||||
|
Loss
on disposal of equipment
|
7,381
|
3,970
|
|||||
|
Investor
relations expense, non-cash warrants
|
3,123
|
37,326
|
|||||
|
Consulting
expense, non-cash warrants
|
8,142
|
-
|
|||||
|
Non-cash
stock based compensation
|
137,043
|
-
|
|||||
|
Deferred
tax assets
|
(48,400
|
)
|
(40,700
|
)
|
|||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable
|
(1,131,773
|
)
|
(1,258,868
|
)
|
|||
|
Refundable
income taxes
|
(188,856
|
)
|
(18,005
|
)
|
|||
|
Inventories
|
(3,471,008
|
)
|
(145,342
|
)
|
|||
|
Prepaid
expenses and other assets
|
(51,618
|
)
|
(25,752
|
)
|
|||
|
Accounts
payable
|
1,342,702
|
526,575
|
|||||
|
Accrued
expenses, including deferred revenue
|
(13,341
|
)
|
113,573
|
||||
|
Net
cash provided by (used in) operating activities
|
(1,556,388
|
)
|
1,825,956
|
||||
|
Cash
Flows From Investing Activities
|
|||||||
|
Purchases
of property, equipment and trademarks
|
(715,127
|
)
|
(1,274,297
|
)
|
|||
|
Cash
Flows From Financing Activities
|
|||||||
|
Net
borrowings (payments) on revolving credit agreement
|
1,924,000
|
(270,000
|
)
|
||||
|
Proceeds
from long-term borrowings
|
-
|
500,000
|
|||||
|
Net
principal payments on long-term borrowings, including capital
lease
obligations
|
(586,852
|
)
|
(513,227
|
)
|
|||
|
Proceeds
from issuance of common stock
|
76,012
|
139,173
|
|||||
|
Tax
benefit from options exercised
|
43,672
|
-
|
|||||
|
Net
cash provided by (used in) financing activities
|
1,456,832
|
(144,054
|
)
|
||||
|
|
|||||||
|
Net
increase (decrease) in cash
|
(814,683
|
)
|
407,605
|
||||
|
Cash
|
|||||||
|
Beginning
of year
|
865,181
|
457,576
|
|||||
|
End
of year
|
$
|
50,498
|
$
|
865,181
|
|||
|
Supplemental
Disclosures of Cash Flow Information
|
|||||||
|
Cash
payments for:
|
|||||||
|
Interest
|
$
|
170,760
|
$
|
119,761
|
|||
|
Income
taxes
|
$
|
725,645
|
$
|
1,110,425
|
|||
|
Supplemental
Schedule of Noncash Investing and Financing Activities
|
|||||||
|
Warrants
issued for investor relations services
|
$
|
-
|
$
|
37,477
|
|||
|
Warrants
issued for consulting services
|
$
|
8,142
|
$
|
-
|
|||
|
Property
acquired under capital leases
|
$
|
957,317
|
$
|
-
|
|||
|
See
Notes to Financial Statements.
|
|||||||
Nature
of business:
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, and credit is granted based upon the
credit
policies of the Company.
A
summary
of the Company’s significant accounting policies follows:
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. We cannot
assure you
that actual results will not differ from those estimates.
Revenue
Recognition: In most cases, the Company recognizes revenue from the
sale of products and billable repairs when the product is delivered to
a common
carrier for shipment and title transfers.
With
one
particular customer, the Company recognizes revenue from the sale of
customized
products when the product is delivered to a customer warehouse location
within
the Company, 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 and 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. We are
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 the Company by 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 the Company’s business involves the Company shipping product to a
primary customer’s location where it is held in a separate warehouse. Revenue is
recognized when that customer notifies the Company that the inventory
has been
removed from the warehouse and title to the product has transferred.
Revenue
recognition occurs for engineering design services as progress billings
are made
and at the conclusion of the project.
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 sales.
For
all sales, the Company uses either a binding purchase order or customer
accepted
and signed engineering quote as evidence of the arrangement. The Company
does
not generally accept returns but does provide a limited warranty as outlined
below under Allowance for Rework and Warranty Costs.
Cash:
The
Company maintains its cash in bank deposit accounts which, at times,
may exceed
federally insured limits. The Company has not experienced any losses
in such
accounts.
Accounts
receivable and Allowance for Doubtful Accounts:
Accounts
receivable are carried at original invoice amount less an estimate made
for
doubtful receivables based on a review of all outstanding amounts on
a monthly
basis. Management determines the allowance for doubtful accounts by regularly
evaluating individual customer receivables and considering a customer’s
financial condition and credit history, and current economic conditions.
Accounts receivable are written off when deemed uncollectible. Recoveries
of
accounts receivable previously written off are recorded when
received.
Note
1. Nature
of Business and Significant Accounting Policies
(Continued)
Inventories:
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 using the last received cost. The
Company
makes provisions for slow moving, estimated excess and obsolete inventory
based
on an analysis of the existing inventory, and specific identification
of
obsolete inventory.
Patents
and trademarks:
Patents
and trademarks are stated at cost and are being amortized using the
straight-line method over their economic useful lives.
Depreciation:
It is
the Company’s policy to include depreciation expense on assets acquired under
capital leases with depreciation expense on owned assets. 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: The
Company reviews its long-lived assets and intangibles 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, the Company 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 and
intangibles. There were no impairment losses recognized in 2006 and
2005.
Allowance
for Rework and Warranty Costs:
The
Company has a reserve for rework, product warranties and customer refunds.
We
provide a limited warranty to our OEM customers that require us to repair
or
replace product that is defective, due to Company workmanship issues,
at no cost
to the customer. In addition, we provide a limited warranty for our
proprietary products for a period of one year, which requires us 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 a percentage
of
sales for the prior twelve-month period plus any specific known warranty
issues.
The product warranty liability reflects management’s best estimate of the
Company’s financial exposure and probable liability under our product warranties
and may differ from actual results.
Changes
in the Company’s warranty liability, which is included in other accrued expenses
on the balance sheets, are approximately as follows:
|
Years
Ended December 31
|
|||||||
|
2006
|
2005
|
||||||
|
Balance,
beginning
|
$
|
117,300
|
$
|
128,000
|
|||
|
Accruals
for products sold
|
248,900
|
130,000
|
|||||
|
Payments
made
|
(240,100
|
)
|
(116,000
|
)
|
|||
|
Changes
in accruals for pre-existing warranties
|
-
|
(24,700
|
)
|
||||
|
Balance,
ending
|
$
|
126,100
|
$
|
117,300
|
|||
Note
1. Nature
of Business and Significant Accounting Policies
(Continued)
Income
taxes:
Deferred
taxes are provided on an asset and liability method whereby deferred
tax assets
are recognized for deductible temporary differences and operating loss
and tax
credit carry forwards, and deferred tax liabilities are recognized for
taxable
temporary differences. Temporary differences are the differences between
the
reported amounts of assets and liabilities and their tax basis.
Deferred
tax assets are reduced by a valuation allowance when, in the opinion
of
management, it is more likely than not that some portion or all of the
deferred
tax assets will not be realized. Deferred tax assets and liabilities
are
adjusted for the effects of changes in tax laws and rates on the date
of
enactment. Investment tax credits, research and development credits,
and job
credits are accounted for by the flow-through method, whereby they reduce
income
taxes currently payable and income tax expense in the period the assets
giving
rise to the credits are placed in service. To the extent such credits
are not
currently utilized on the Company’s tax return, deferred tax assets, subject to
considerations about the need for a valuation allowance, are recognized
for the
carry forward amount.
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 the Company having the
same or
similar remaining maturities and collateral requirements. The carrying
value of
all other financial instruments approximates fair value due to the short-term
nature of the instruments.
Earnings
per common share: Basic earnings per common share are computed by
dividing net income 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).
The dilutive effect of the additional shares for the years ended
December 31, 2006 and 2005, was to increase the weighted-average shares
outstanding by 100,829 and 135,490, respectively.
Employee
stock plans:
At
December 31, 2006, the Company has stock-based compensation plans, which
are
described more fully in Note 7. The Company 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,
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.
Recently
issued accounting pronouncements:
In July
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in
Income Taxes--an Interpretation of FASB Statement 109 ("FIN 48"), which
clarifies the accounting for uncertainty in tax positions. This interpretation
provides that the tax effects from an uncertain tax position can be recognized
in financial statements, only if the position is more likely than not
of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective as of the beginning of fiscal 2007,
with the
cumulative effect of any change in accounting principle recorded as an
adjustment to opening retained earnings. We are currently evaluating
the impact,
if any, adopting FIN 48 may have on our financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
No. 157). SFAS No. 157 establishes a common definition for fair value
to be
applied to US GAAP guidance requiring use of fair value, establishes
a framework
for measuring fair value, and expands disclosure about such fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. We are currently assessing the impact, if any, SFAS
No. 157,
may have on our financial position and results of operations.
Note
1. Nature
of
Business and Significant Accounting Policies (Continued)
Research
and development expense:
The
Company expenses research and development costs as incurred. Research
and
development expenses of $642,330 and $798,138 were charged to operations
during
the years ended December 31, 2006 and 2005, respectively.
Reclassifications:
Certain
income statement amounts for the year ended December 31, 2005 have been
reclassified to be consistent with the classifications adopted for the
year
ended December 31, 2006.
Note
2. Inventories
The
components of inventories at December 31, 2006 and 2005, are as
follows:
|
December
31
|
|||||||
|
2006
|
2005
|
||||||
|
Raw
materials
|
$
|
4,880,949
|
$
|
2,339,314
|
|||
|
Work
in progress
|
327,212
|
163,778
|
|||||
|
Finished
goods
|
1,976,236
|
1,212,297
|
|||||
|
Obsolescence
reserve
|
(189,900
|
)
|
(191,900
|
)
|
|||
|
Total
|
$
|
6,994,497
|
$
|
3,523,489
|
|||
Note
3. Financing
Arrangement and Long-Term Debt
The
Company has a $4,000,000 revolving line of credit agreement with M&I Bank of
Minneapolis, Minnesota, expiring June 29, 2007, if not renewed. Advances
are due on demand, secured by substantially all assets of the Company,
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 7.85% as of
December
31, 2006. Advances outstanding on the revolving line of credit agreement
as of
December 31, 2006 and 2005 were $1,924,000 and $0, respectively. At December
31,
2006, $2,076,000 was available for borrowing under the terms of this
agreement.
See also (a) following.
During
2006, the Company entered into a Master Lease of Personal Property with
M&I
Equipment Finance Company of Milwaukee, Wisconsin. Under the lease, the
Company
can acquire new capital equipment to be used in the Company’s manufacturing
processes in an amount of up to $1,200,000. 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, 2006, the Company had drawn funds under
this
lease agreement totaling $957,317, of which $908,002 remained outstanding.
Note
3. Financing
Arrangement and Long-Term Debt (Continued)
Long-term
debt:
The
following is a summary of long-term debt:
|
December
31
|
|||||||
|
2006
|
2005
|
||||||
|
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)
|
$
|
826,394
|
$
|
906,820
|
|||
|
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)
|
309,602
|
559,602
|
|||||
|
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)
|
288,868
|
413,868
|
|||||
|
Capital
lease obligations bearing interest ranging from 7.58% to
8.44%,
|
|||||||
|
due
in monthly installments of $1,110 to $7,783, to September
2011,
|
|||||||
|
secured
by equipment (Note 4)
|
908,002
|
82,110
|
|||||
|
$
|
2,332,866
|
$
|
1,962,400
|
||||
|
Less
current maturities
|
627,290
|
537,537
|
|||||
|
Total
long-term debt
|
$
|
1,705,576
|
$
|
1,424,863
|
|||
(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.
Approximate
maturities of long-term debt for years subsequent to December 31, 2006, are
as follows:
|
2007
|
$
|
627,000
|
||
|
2008
|
456,000
|
|||
|
2009
|
331,000
|
|||
|
2010
|
315,000
|
|||
|
2011
|
267,000
|
|||
|
Thereafter
|
337,000
|
|||
|
Total
|
$
|
2,333,000
|
Note
4. Commitments
and Contingencies
Capital
leases: The
Company is leasing certain equipment under capital leases. The cost and
accumulated depreciation of assets acquired under capital leases at December
31,
2006 and 2005, are as follows:
|
2006
|
2005
|
||||||
|
Cost
|
$
|
1,439,997
|
$
|
441,598
|
|||
|
Accumulated
depreciation
|
485,134
|
315,427
|
|||||
|
Net
leased property under capital leases
|
$
|
954,863
|
$
|
126,171
|
|||
The
future minimum lease payments under capital leases and the aggregate
present
value of the net minimum lease payments at December 31, 2006, are
approximately as follows:
|
Minimum
Lease Payments:
|
||||
|
2007
|
$
|
233,000
|
||
|
2008
|
232,000
|
|||
|
2009
|
232,000
|
|||
|
2010
|
232,000
|
|||
|
2011
|
157,000
|
|||
|
1,086,000
|
||||
|
Less
amount representing interest
|
178,000
|
|||
|
Present
value of net minimum lease payments (included in long-term
debt) (Note
3)
|
$
|
908,000
|
||
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 the Company’s
processes and products. As of December 31, 2006, the Company 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, we cannot
reasonably estimate the amount of future liability, if
any.
Note
5. Deferred
Revenue
During
1994, the Company and the city of Mankato entered into a tax increment
financing
agreement for the construction of the Company’s operating facility. In
connection with this agreement, the city donated land improvements to
the
Company 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 expense are as follows:
|
December
31
|
|||||||
|
2006
|
2005
|
||||||
|
Currently
payable
|
$
|
578,400
|
$
|
1,123,700
|
|||
|
Deferred
|
(48,400
|
)
|
(40,700
|
)
|
|||
|
$
|
530,000
|
$
|
1,083,000
|
||||
The statutory income tax rate reconciliation to the effective rate is as follows:
|
December
31
|
|||||||
|
2006
|
2005
|
||||||
|
Statutory
U.S. income tax rate
|
34
|
%
|
34
|
%
|
|||
|
State
taxes, net of federal tax effect
|
4
|
%
|
4
|
%
|
|||
|
Other,
including permanent differences
|
(4
|
)%
|
(3
|
)%
|
|||
|
Effective
income tax rate
|
34
|
%
|
35
|
%
|
|||
Net
deferred tax assets (liabilities) consist of the following components
as of
December 31, 2006 and 2005:
|
December
31
|
|||||||
|
2006
|
2005
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Inventory
|
$
|
150,400
|
$
|
111,700
|
|||
|
Allowance
for doubtful accounts
|
7,400
|
7,400
|
|||||
|
Non-qualified
stock options
|
27,000
|
-
|
|||||
|
Accrued
expenses
|
159,400
|
138,000
|
|||||
|
Other
|
1,800
|
6,300
|
|||||
|
346,000
|
263,400
|
||||||
|
Deferred
tax liabilities:
|
|||||||
|
Property
and equipment
|
255,000
|
266,500
|
|||||
|
Prepaid
expenses
|
68,000
|
22,300
|
|||||
|
323,000
|
288,800
|
||||||
|
Net
deferred tax assets (liabilities)
|
$
|
23,000
|
$
|
(25,400
|
)
|
||
The deferred tax amounts mentioned above have been classified on the accompanying balance sheets as of December 31, 2006 and 2005, as follows:
|
December
31
|
|||||||
|
2006
|
2005
|
||||||
|
Current
assets
|
$
|
278,000
|
$
|
236,500
|
|||
|
Noncurrent
liabilities
|
(255,000
|
)
|
(261,900
|
)
|
|||
|
Net
deferred tax assets (liabilities)
|
$
|
23,000
|
$
|
(25,400
|
)
|
||
Note
7. Warrants
and Stock-Based Compensation Plans
Warrants:
On
February 1, 2005, the Company 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, 2006, 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 $3,123 and $37,326 for the years ended December
31,
2006 and 2005, respectively. The total estimated fair value of the outstanding
warrants, $37,477, is reflected in additional paid in capital in the
stockholders’ equity section at December 31, 2006 and 2005.
On
February 16, 2006, the Company 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. The Company 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. Warrants
expire on
February 16, 2016, if not exercised. As of December 31, 2006, the first
2,500
shares were valued and vested using the Black-Scholes pricing model at
a fair
value of $3.26 amounting to $8,142 of expense booked to consulting expenses
for
the period. The agreement between the Company and Board Assets, Inc.
was
terminated in October 2006. Based on this termination, the second 2,500
shares
will not vest and the Company will not incur additional expense for these
shares.
On
September 9, 2006, the Company 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. The Company and Genoa have developed two strategic business initiatives
for 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. The Company will incur consulting expense of approximately
$45,000
based on using the Black-Scholes pricing model upon completion of these
initiatives and vesting of options.
Stock
option and employee stock purchase plans: As of December 31, 2006, the
Company 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 to date include 78,000 shares of incentive
stock
options and 44,000 nonqualified stock options of which all 122,000 are
outstanding and 44,000 of which are vested at December 31, 2006. The
exercise
price is equal to the fair market value of the Company’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 the Company’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, 2006 there were 164,040 options
outstanding of which 130,520 are vested.
Note
7. Warrants
and Stock-Based Compensation Plans (Continued)
1997
Employee Stock Purchase Plan - The Employee Stock Purchase Plan (ESPP)
has
provided employees of the Company 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 since
its inception of which 79,826 have been issued and 20,174 remain available
for
grant. The ESPP expires December 31, 2007. The Company issued 8,375 shares
and
incurred $9,926 of compensation expense for the year ended December 31,
2006.
Prior
to
January 1, 2006, the Company 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). The Company did not
recognize the value of stock-based compensation issued to employees and
directors in its Statements of Income prior to January 1,
2006,
as
all options granted under its equity-based compensation plans had an
exercise
price equal to the market value of the underlying common stock on the
date of
the grant. Effective January 1, 2006, the Company 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 year ended December 31, 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. Prior periods have not been restated to reflect
the
impact of adopting the new standard. As a result of adopting SFAS 123R
on
January 1, 2006, our net income for the twelve months ended December
31, 2006
was $137,043 lower than if we had continued to account for stock-based
compensation under APB Opinion No. 25 for our stock option grants to
employees.
A total of $8,108 was capitalized in inventory costs for the year ended
December
31, 2006.
The
Company 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
|
||||||
|
|
2006
|
2005
|
|||||
|
Expected
life, in years
|
5-10
|
5-10
|
|||||
|
Expected
volatility
|
81.9
|
%
|
68.6
|
%
|
|||
|
Risk-free
interest rate
|
4.7
|
%
|
3.9
|
%
|
|||
|
Dividend
yield
|
0.0
|
%
|
0.0
|
%
|
|||
The
Company 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 the Company’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.
Note
7. Warrants
and Stock-Based Compensation Plans (Continued)
The
Company 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, the Company revised its Statements of Cash Flows presentation
to
report any tax benefit from the exercise of stock options as financing
cash
flows. For the twelve months ended December 31, 2006, there were stock
option
exercises and disqualifying stock dispositions which triggered $43,672
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 $76,012 for the year
ended
December 31, 2006. For the year ended December 31, 2006, 30,847 options
were
exercised in stock swaps, using previously owned shares of the Company’s common
stock as payment for the shares.
The
following table illustrates the effect on net income and earnings per
share if
the Company had applied the fair value recognition provisions of SFAS
123R to
options granted under the Company’s stock option plans for the year ended
December 31, 2005. For purposes of this pro forma disclosure, the value
of the
options is estimated using the Black-Scholes option pricing model and
amortized
to expense over the options’ vesting periods.
|
For
the Year Ended December 31, 2005
|
||||
|
Net
income
|
||||
|
As
reported
|
$
|
2,049,356
|
||
|
Deduct
total stock-based compensation expense determined
|
||||
|
under
fair value-based method for all awards, net of related tax
effects
|
(106,757
|
)
|
||
|
Pro
forma
|
$
|
1,942,599
|
||
|
Basic
earnings per share:
|
||||
|
As
reported
|
$
|
0.59
|
||
|
Pro
forma
|
0.56
|
|||
|
Diluted
earnings per share:
|
||||
|
As
reported
|
0.57
|
|||
|
Pro
forma
|
0.54
|
|||
Note
7. Warrants
and Stock-Based Compensation Plans (Continued)
The
following table represents stock option activity for the twelve months
ended
December 31, 2006:
|
Weighted-Average
|
||||||||||
|
Number
of
|
Weighted-Average
|
Remaining
|
||||||||
|
Shares
|
Exercise
Price
|
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
exercisable at December 31, 2006
|
174,520
|
$
|
2.85
|
3.62
Yrs
|
||||||
The
aggregate intrinsic value of options outstanding at December 31, 2006
and 2005
was $174,718 and $317,896, respectively. The aggregate intrinsic value
of
options exercisable at December 31, 2006 and 2005 was $139,286 and $228,387,
respectively. Total intrinsic value of options exercised for the twelve
months
ended December 31, 2006 and 2005 was $240,628 and $230,580,
respectively.
During
the years ended December 31, 2006 and 2005, the Company granted 100,000
and
33,000 options, respectively. These options had a weighted average grant
date
fair value of $2.61 and $3.30 per share, respectively.
The
following table summarizes information about stock options outstanding
at
December 31, 2006:
|
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
|
|||||||||||
|
$0.45
- $0.90
|
19,800
|
0.8
|
$
|
0.64
|
19,800
|
$
|
0.64
|
|||||||||
|
$0.91
- $1.34
|
13,640
|
1.7
|
1.25
|
8,800
|
1.27
|
|||||||||||
|
$1.35
- $1.79
|
8,800
|
1.9
|
1.45
|
4,840
|
1.45
|
|||||||||||
|
$2.24
- $2.69
|
41,300
|
2.0
|
2.37
|
30,380
|
2.35
|
|||||||||||
|
$2.70
- $3.14
|
69,500
|
2.4
|
2.91
|
55,700
|
2.89
|
|||||||||||
|
$3.15
- $3.58
|
54,000
|
5.5
|
3.34
|
-
|
-
|
|||||||||||
|
$3.59
- $4.03
|
24,000
|
5.7
|
3.62
|
-
|
-
|
|||||||||||
|
$4.04
- $4.48
|
55,000
|
7.7
|
4.26
|
55,000
|
4.26
|
|||||||||||
|
286,040
|
4.1
|
$
|
2.95
|
174,520
|
$
|
2.85
|
||||||||||
At
December 31, 2006, there was $172,088 of unrecognized compensation cost
related
to share-based payments which is expected to be recognized over a
weighted-average period of 1.37 years.
Note
8. Employee
Benefit Plans
Pension
plan:
The
Company 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 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. The Company contributed approximately $104,900 and
$87,500
to the plan for the years ended December 31, 2006 and 2005, respectively.
In
addition, the Company 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, 2006
and 2005.
Health
Savings Account: Effective
January 1, 2006, the Company adopted a health savings account plan for
its
employees who meet certain service requirements. The plan provides for
the
company 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. The Company makes contributions to the plan
on a
quarterly basis on the first day of each quarter. The contributions cannot
be
refunded to the company if the employee’s employment with the company is
terminated voluntarily or involuntarily. The Company
contributed approximately $193,000 to the plan for the year ended
December 31, 2006.
Note
9. Major
Customers, International Sales and Enterprisewide
Disclosures
Major
customers:
The
Company has customers which accounted for more than 10 percent of net
sales for
the years ended December 31, 2006 and 2005, as follows:
|
2006
|
2005
|
||||||
|
Sales
percentage:
|
|||||||
|
Customer
A
|
38
|
%
|
52
|
%
|
|||
|
Customer
B
|
19
|
%
|
5
|
%
|
|||
|
Accounts
receivable percentage at December 31:
|
|||||||
|
Customer
A
|
7
|
%
|
41
|
%
|
|||
|
Customer
B
|
17
|
%
|
17
|
%
|
|||
Sales
to related parties:
The
Company has a director who also serves as a director of a customer. The
Company
had sales to this customer of $1,694,300 and $2,206,466 for the years
ended
December 31, 2006 and 2005 and an outstanding accounts receivable balance
of
$192,542 and $169,835 from this customer at December 31, 2006 and 2005,
respectively.
International
sales:
Export
sales to international customers for 2006 and 2005 were approximately
$200,500
and $426,500, respectively. Accounts receivable from international customers
were approximately $6,900 and $55,000 at December 31, 2006 and 2005,
respectively.
Enterprisewide
disclosures:
The
following table presents approximate revenue from external customers
for each of
the Company’s groups of products and services:
|
Years
Ended December 31
|
|||||||
|
2006
|
2005
|
||||||
|
Proprietary
products and services, primarily for the security/industrial
markets
|
$
|
3,259,900
|
$
|
3,086,600
|
|||
|
Electronic
controls and assemblies for OEM customers
|
34,605,800
|
27,281,500
|
|||||
|
Freight
|
79,300
|
64,900
|
|||||
|
$
|
37,945,000
|
$
|
30,433,000
|
||||
Note
10. Shareholder
Rights Plan
On
December 9, 2003, the Company’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 the Company 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 the
Company’s outstanding common stock. The rights are nonvoting, pay no dividends,
expire on December 9, 2013, and may be redeemed by the Company 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 the Company is acquired in a merger or other
business
combination, or if 50 percent or more of the Company’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 the
Company’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.
None.
Evaluation
of Disclosure Controls Procedures.
The
Company’s Chief Executive Officer, Lorin E. Krueger, and Chief Financial
Officer, Glenn A. Kermes, have reviewed the Company’s disclosure controls and
procedures as of the end of the period covered by this report. Based
upon this
review, these officers believe that the Company’s disclosure controls and
procedures are effective in ensuring that information that is required
to be
disclosed by the Company in reports that it files under the Securities
Exchange
Act of 1934 is recorded, processed and summarized and reported within
the time
periods specified in the rules and forms of the Securities and Exchange
Commission.
Changes
in Internal Control.
During
the fourth quarter, the Company’s new Chief Financial Officer Glenn Kermes
started his employment thereby reinstating a second review of the preparation
of
the financial statements. This additional review may be deemed a change
in the
Company’s internal control over financial reporting during the period that has
materially affected, or is reasonably likely to materially affect, the
Company’s
internal control over financial reporting.
On
December 20, 2006, the Compensation Committee approved the 2007 Incentive
Bonus
Plan (the "Plan") to reward employees,
including executive officers, for performance contributing to pre-tax,
pre-stock based compensation, pre-incentive plan, net income in excess
of
minimum limits defined annually at the beginning of the year by the Board
of
Directors. The Plan is filed as Exhibit 10.30 to
this Form 10-KSB and is incorporated by reference
herein.
The
information required by Item 9 is either set forth under “Executive Officers of
the Company” at the end of Part I of this Form 10-KSB or is incorporated by
reference to the Company’s definitive proxy statement for its 2007 Annual
Meeting of Shareholders under the captions “Corporate Governance,” “Election of
Directors” and “Compliance with Section 16(a) of the Exchange Act.”
The
information required by Item 10 is incorporated by reference to the Company’s
definitive proxy statement for its 2007 Annual Meeting of Shareholders
under the
captions “Executive Compensation” and “Corporate Governance - Compensation to
Non-Employee Directors.”
The
information required by Item 11 relating to security ownership of certain
holders is incorporated by reference to the Company’s definitive proxy statement
for its 2007 Annual Meeting of Shareholders under the caption “Principal
Shareholders and Management Shareholdings.”
The
following table provides information concerning the Company’s equity
compensation plans as of December 31, 2006.
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under
equity
compensation plans (excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
|
Equity
compensation plans approved by security holders
|
286,040
|
$2.95
|
298,174
(1)
|
|
Equity
compensation plans not approved by security holders (2)
|
45,000
|
$3.72
|
0
|
|
TOTALS
|
331,040
|
$3.05
|
298,174
|
(1)
Includes 20,174 shares available for issuance under the Company’s 1997 Employee
Stock Purchase Plan.
(2)
The
plans consist of four warrants to purchase shares of the Company’s Common Stock
issued in 2005 and 2006 as partial consideration for consulting services
to the
following: (i) Hayden Communications, Inc., a communication consulting
firm -
warrant to purchase 20,000 shares (10,000 shares exercisable until August
1,
2008 and 10,000 shares exercisable until February 1, 2009); (ii) Board
Assets,
Inc., a board evaluation and consulting firm - warrant to purchase 5,000
shares,
which warrant vests upon performance of certain services and expires
on February
16, 2016 (2,500 shares vested on July 17, 2006, and the remaining shares
will
not vest because the consulting arrangement has been terminated); and
(iii) each
of two principals of Genoa Business Advisors, LLC, a business consulting
firm -
warrant to purchase 10,000 shares, which vest in 5,000-share increments
upon
performance of certain services and expire on September 6, 2011.
The
information required by Item 12 is incorporated by reference to the Company’s
definitive proxy statement for its 2007 Annual Meeting of Shareholders
under the
captions “Corporate Governance” and “Certain Transactions.”
The
following exhibits are included in this report: See “Exhibit Index to Form
10-KSB” following the signature page of this Form 10-KSB.
The
information requested in this item is incorporated by reference to the
Company’s
definitive proxy statement for its 2007 Annual Meeting of Shareholders
under the
caption “Independent Registered Public Accounting Firm.”
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. | ||
| |
|
|
| Date: March 28, 2007 | By: |
/s/ Lorin
E.
Krueger
|
|
|
||
|
Title President
and Chief Executive 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 Lorin E.
Krueger
and Glenn A. Kermes as his true and lawful attorneys-in-fact and agents,
each
acting alone, with full power of substitution and re-substitution, 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.
|
Signature
and Title
|
Date
|
|
/s/
Lorin E. Krueger
|
|
|
Lorin
E Krueger, Chief Executive Officer, President and Director
(Principal
Executive Officer)
|
March 28, 2007 |
|
/s/
Glenn A. Kermes
|
|
|
Glenn
A. Kermes, Chief Financial Officer (Principal Financial Officer
and
Principal Accounting Officer)
|
March 28, 2007 |
|
/s/
Thomas J. de Petra
|
|
|
Thomas
J. de Petra, Chairman of the Board of Directors
|
March 28, 2007 |
|
/s/
Richard T. Speckmann
|
|
|
Richard
T. Speckmann, Director
|
March 28, 2007 |
|
/s/
James L. Reissner
|
|
|
James
L. Reissner, Director
|
March 28, 2007 |
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
EXHIBIT
INDEX TO FORM 10-KSB
|
For
the Fiscal Year Ended December 31, 2006
|
Commission
File No.: 1-15637
|
__________________________
WINLAND
ELECTRONICS, INC.
__________________________
|
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 Current
Report on Form
8-K dated March 5, 2001)
|
|
3.3
|
Certificate
of Designation of Series A Junior Participating Preferred Stock
- See
Exhibit 4.2
|
|
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)
|
|
4.2
|
Rights
Agreement dated December 9, 2003 between the Company and Wells
Fargo Bank
Minnesota, N.A., which includes the form of Certificate of
Designation as
Exhibit A, the form of Right Certificate as Exhibit B and the
Summary of
Rights to Purchase Preferred Shares as Exhibit C (Incorporated
by
reference to Exhibit 4.1 to the Form 8-A Registration Statement
No.
001-15637 filed on December 10, 2003)
|
|
4.3
|
First
Amendment to Rights Agreement dated December 1, 2004 by and
among the
Company, Wells Fargo Bank, N.A. and Registrar and Transfer
Company
(Incorporated by reference to Exhibit 4.2 to Form 8-A/A-1 Registration
Statement No. 001-15637 filed December 3, 2004)
|
|
10.1
|
Winland
Electronics, Inc. 1997 Employee Stock Purchase Plan as amended
June 17,
2003 (Incorporated by reference to Exhibit 10.1 to Form 10-QSB
for the
quarter ended June 30, 2003)**
|
|
10.2
|
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)**
|
|
10.3
|
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)**
|
|
10.4
|
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)**
|
|
10.5
|
Credit
and Security Agreement between the Company and M&I Marshall &
Ilsley Bank (M&I), dated June 30, 2003 and Note dated June 30, 2003 in
the principal amount of $2,500,000 in favor of M&I (Incorporated by
reference to Exhibit 10.1 to Form 10-QSB for quarter ended
June 30,
2003)
|
|
10.6
|
Term
Note in the principal amount of $1,000,000 dated September
30, 2004 in
favor of U.S. Bank, N.A. (Incorporated by reference to Exhibit
99.1 to
Current Report on Form 8-K dated September 30, 2004 and filed
on October
6, 2004)
|
|
10.7
|
Term
Loan Agreement dated September 30, 2004 between the Company
and U.S. Bank,
N.A. (Incorporated by reference to Exhibit 99.2 to Current
Report on Form
8-K dated September 30, 2004 and filed on October 6, 2004)
|
|
10.8
|
Addendum
to Term Loan Agreement and Note dated September 30, 2004 between
the
Company and U.S. Bank, N.A.(Incorporated by reference to Exhibit
99.3 to
Current Report on Form 8-K dated September 30, 2004 and filed
on October
6, 2004)
|
|
10.9
|
Mortgage,
Security Agreement and Assignment of Rents dated September
30, 2004 bet in
favor of U.S. Bank, N.A. (Incorporated by reference to Exhibit
99.4 to
Current Report on Form 8-K dated September 30, 2004 and filed
on October
6, 2004)
|
|
10.10
|
2005
Equity Incentive Plan (Incorporated by reference to Exhibit
10.1 to Current Report on Form 8-K dated May 10, 2005 and filed
on May 13,
2005)
|
|
10.11
|
Form
of Incentive Stock Option Agreement under the 2005 Equity Incentive
Plan
(Incorporated by reference to Exhibit 10.2 to Current Report
on Form 8-K
dated May 10, 2005 and filed on May 13, 2005)
|
|
10.12
|
Form
of Nonqualified Stock Option Agreement under the 2005 Equity
Incentive
Plan (Incorporated by reference to Exhibit 10.3 to Current
Report on Form
8-K dated May 10, 2005 and filed on May 13, 2005)
|
|
10.13
|
Form
of Restricted Stock Agreement under the 2005 Equity Incentive
Plan
(Incorporated by reference to Exhibit 10.4 to Current Report
on Form 8-K
dated May 10, 2005 and filed on May 13, 2005)
|
|
10.14
|
Amendment
No. 1 to Credit Agreement between the Company and M&I Marshall &
Ilsley Bank dated April 15, 2004 and Term Note dated April
15, 2004
(Incorporated by reference to Exhibit 10.1 to Form 10-QSB for
quarter
ended June 30, 2005)
|
|
10.15
|
Amendment
No. 2 to Credit Agreement between the Company and M&I Marshall &
Ilsley Bank dated June 25, 2004 (Incorporated by reference
to Exhibit 10.2
to Form 10-QSB for quarter ended June 30, 2005)
|
|
10.16
|
Amendment
No. 3 to Credit Agreement between the Company and M&I Marshall &
Ilsley Bank dated August 3, 2004 (Incorporated by reference
to Exhibit
10.3 to Form 10-QSB for quarter ended June 30, 2005)
|
|
10.17
|
Amendment
No. 4 to Credit Agreement between the Company and M&I Marshall &
Ilsley Bank dated February 23, 2005 (Incorporated by reference
to Exhibit
10.4 to Form 10-QSB for quarter ended June 30, 2005)
|
|
10.18
|
Amendment
No. 5 to Credit Agreement between the Company and M&I Marshall &
Ilsley Bank dated April 4, 2005 (Incorporated by reference
to Exhibit 10.5
to Form 10-QSB for quarter ended June 30, 2005)
|
|
10.19
|
Amendment
No.6 to Credit Agreement between the Company and M&I Marshall &
Ilsley Bank dated June 23, 2005 (Incorporated by reference
to Exhibit 10.6
to Form 10-QSB for quarter ended June 30, 2005)
|
|
10.20
|
Amendment
No.7 to Credit Agreement between the Company and M&I Marshall &
Ilsley Bank dated June 23, 2005 (Incorporated by reference
to Exhibit 10.2
to Form 10-QSB for quarter ended June 30, 2006)
|
|
10.21
|
Amendment
No.8 to Credit Agreement between the Company and M&I Marshall &
Ilsley Bank dated June 23, 2005 (Incorporated by reference
to Exhibit 10.3
to Form 10-QSB for quarter ended June 30, 2006)
|
|
10.22
|
Master
Lease Agreement between the Company and M&I Marshall & Ilsley Bank
dated June 28, 2006 (Incorporated by reference to Exhibit 10.1
to Form
10-QSB for quarter ended June 30, 2006)
|
|
10.23
|
Compensation
Arrangements for Directors as of January 1, 2006 (Incorporated
by
reference to Exhibit 10.28 to Form 10-KSB for year ended December
31,
2005)**
|
|
10.24
|
2006
Incentive Bonus Plan (Incorporated by reference to Exhibit
10.30 to Form
10-KSB for year ended December 31, 2005)**
|
|
10.25
|
Employment
Agreement dated January 23, 2007 between the Company and Lorin
E. Krueger
(Incorporated by reference to Exhibit 10.1 to Current Report
on Form 8-K
dated January 23, 2007) **
|
|
10.26
|
Employment
Agreement dated January 23, 2007 between the Company and Glenn
A. Kermes
(Incorporated by reference to Exhibit 10.2 to Current Report
on Form 8-K
dated January 23, 2007) **
|
|
10.27
|
Employment
Agreement dated February 5, 2007 between the Company and Terry
E. Treanor
(Incorporated by reference to Exhibit 10.1 to Current Report
on Form 8-K
dated February 5, 2007) **
|
|
10.28
|
Employment
Agreement dated February 14, 2007 between the Company and Dale
A.
Nordquist (Incorporated by reference to Exhibit 10.1 to Current
Report on
Form 8-K dated February 14, 2007) **
|
|
10.29*
|
Employment
Agreement dated February 3, 2007 between the Company and Gregory
W.
Burneske**
|
|
10.30*
|
2007
Incentive Bonus Plan**
|
|
23.1*
|
Consent
of McGladrey & Pullen, LLP
|
|
24.1*
|
Power
of Attorney for Lorin E. Krueger, Thomas J. de Petra, Richard
T.
Speckmann, James L. Reissner (included on signature page of
this Form
10-KSB)
|
|
31.1*
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
|
31.2*
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
|
32.1*
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
32.2*
|
Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
*
Filed
herewith.
**
Management agreement or compensatory plan or arrangement.