**FORM 10-QSB**

 

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

** **

**Quarterly Report underSection 13 or 15(d)**

**of the Securities ExchangeAct of 1934**

 

**For Quarter Ended: September 30, 2001**

**Commission File Number:  0-18393**

 

**WINLANDELECTRONICS, INC.**

(Exact name of small business issuer as specified inits charter)

 

| **Minnesota**              | **41-0992135**       |
|----------------------------|----------------------|
| (state or other  juris-    | (I.R.S. Employer     |
| diction of  incorporation) | Identification  No.) |
|                       |                 |

**1950 Excel Drive, Mankato,Minnesota     56001**

(Address of principal executive offices)(zip code)

 

Registrant's telephone number, including area code:

**(507) 625-7231**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

                Yes  ý                                   No  o

 

Indicate the number ofshares outstanding of each of the issuer's classes of common stock, as of thelatest practicable date:  As of October31, 2001, the issuer had 2,955,872 shares of Common Stock, $.01 par value,outstanding.

 

                Transitional Small Business Disclosure Format (checkone):

 

                Yes  o                                   No  ý

#### ** **

####  

**PART I-FINANCIAL INFORMATION**

** **

** **

**ITEM 1:FINANCIAL STATEMENTS**

** **

** **

**WINLANDELECTRONICS, INC.**

**BALANCE SHEETS**

** **

 
|                                       |   | **September 30,** |           | **December  31,** |           |
|--------------------------------------------|--------|-------------------|----------------|-------------------|----------------|
| **ASSETS**                                 |   | **2001**          |           | **2000**          |           |
|                                       |   | **(UNAUDITED)**   | ** **     |              |           |
| **Current Assets**                         |   |              | ** **     |              |           |
| Cash                                       |   | **$**             | **147,967**    | ** **        | $              | 38,961 |   |
| Accounts and notes receivable, net         |   | **2,142,184**     | ** **     | 3,435,030         |           |
| Income tax receivable                      |   | **249,175**       | ** **     | 127,252           |           |
| Inventories                                |   | **2,880,957**     | ** **     | 5,270,029         |           |
| Prepaid expenses                           |   | **117,342**       | ** **     | 56,599            |           |
| Deferred taxes                             |   | **244,100**       | ** **     | 244,100           |           |
| **Total current assets**                   |   | **5,781,725**     | ** **     | 9,171,971         |           |
|                                       |   |              | ** **     |              |  

  |
| **Other Assets**                           |   |              | ** **     |              |           |
| Patent and trademarks, net of amortization |   | **1,395**         | ** **     | 2,498             |           |
|                                       |   |              | ** **     |              |           |
| **Property and Equipment, at cost:**       |   |              | ** **     |              |           |
| Land and land improvements                 |   | **272,901**       | ** **     | 272,901           |           |
| Building                                   |   | **2,983,586**     | ** **     | 2,983,586         |           |
| Machinery and equipment                    |   | **3,696,022**     | ** **     | 3,778,392         |           |
| Data processing equipment                  |   | **1,302,080**     | ** **     | 1,277,413         |           |
| Office furniture and equipment             |   | **333,807**       | ** **     | 351,960           |           |
| **Total property and equipment**           |   | **8,588,396**     | ** **     | 8,664,252         |           |
| Less accumulated depreciation              |   | **(3,633,555**    | **)**          | (3,131,612        | )              |
| **Net property and equipment**             |   | **4,954,841**     | ** **     | 5,532,640         |           |
| **Total assets**                           |   | **$**             | **10,737,961** |              | $              | 14,707,109 |   |
|                                       |   |              | ** **     |              |           |
|                                            |        |                   |                |                   |                |  |  |  |

See Notes to the Interim Financial Statements

 

 

#### **WINLAND ELECTRONICS, INC.**

**BALANCE SHEETS**

 

 
|                                           |   | **September 30,** |           | **December  31,** |   |
|------------------------------------------------|--------|-------------------|----------------|------------------------|--------|
| **LIABILITIES AND STOCKHOLDERS' EQUITY**       |   | **2001**          |           | **2000**               |   |
|                                           |   | **(UNAUDITED)**   | ** **     |                   |   |
| **Current Liabilities**                        |   |              | ** **     |                   |   |
| Note payable to bank                           |   | **$**             | **2,619,501**  | ** **             | $      | 3,924,501 |   |
| Current maturities of long-term debt           |   | **519,336**       | ** **     | 713,845                |   |
| Accounts payable                               |   | **770,278**       | ** **     | 2,107,319              |   |
| Accrued expenses:                              |   |              | ** **     |                   |   |
| Compensation                                   |   | **265,003**       | ** **     | 225,767                |   |
| Other                                          |   | **99,658**        | ** **     | 125,719                |   |
| **Total current liabilities**                  |   | **4,273,776**     | ** **     | 7,097,151              |   |
|                                           |   |              | ** **     |                   |   |
| Deferred Revenue                               |   | **189,133**       | ** **     | 195,238                |   |
| Long-Term Debt, less current maturities        |   | **2,552,368**     | ** **     | 2,924,885              |   |
| Deferred Taxes                                 |   | **189,300**       | ** **     | 189,300                |   |
| **Total long-term liabilities**                |   | **2,930,801**     | ** **     | 3,309,423              |   |
|                                           |   |              | ** **     |                   |   |
| **Total liabilities**                          |   | **7,204,577**     | ** **     | 10,406,574             |   |
|                                           |   |              | ** **     |                   |   |
| **Stockholders' Equity**                       |   |              | ** **     |                   |   |
| Common stock                                   |   | **29,559**        | ** **     | 29,523                 |   |
| Additional paid-in capital                     |   | **2,246,169**     | ** **     | 2,242,423              |   |
| Retained earnings                              |   | **1,257,656**     | ** **     | 2,028,589              |   |
| **Total stockholders' equity**                 |   | **3,533,384**     | ** **     | 4,300,535              |   |
| **Total liabilities and stockholders' equity** |   | **$**             | **10,737,961** | ** **             | $      | 14,707,109 |   |
|                                           |   |              | ** **     |                   |   |
|                                           |   |              | ** **     |                   |   |

#### **See Notes to the InterimFinancial Statements**

 

 

#### **WINLAND ELECTRONICS, INC.**

**STATEMENTS OF INCOME**

**For theThree Months Ended September 30, 2001 and 2000**

**(UNAUDITED)**

** **

** **

 
|                                                  |   | **2001**      |          | **2000**   |   |
|-------------------------------------------------------|--------|---------------|---------------|------------|--------|
|                                                  |   |          | ** **    |       |   |
| Net sales                                             |   | **$**         | **3,195,580** | ** ** | $      | 4,658,615 |   |
| Cost of sales                                         |   | **2,678,026** | ** **    | 4,155,017  |   |
| **Gross profit**                                      |   | **517,554**   | ** **    | 503,598    |   |
|                                                  |   |          | ** **    |       |   |
| Operating expenses:                                   |   |          | ** **    |       |   |
| General and administrative                            |   | **453,837**   | ** **    | 271,878    |   |
| Research and development                              |   | **213,051**   | ** **    | 291,430    |   |
| Marketing                                             |   | **189,363**   | ** **    | 143,348    |   |
|                                                  |   | **856,251**   | ** **    | 706,656    |   |
|                                                  |   |          | ** **    |       |   |
| **Operating loss**                                    |   | **(338,697**  | **)**         | (203,058   | )      |
|                                                  |   |          | ** **    |       |   |
| Other income (expenses):                              |   |          | ** **    |       |   |
| Interest expense                                      |   | **(109,520**  | **)**         | (122,225   | )      |
| Other income, net                                     |   | **14,056**    | ** **    | 16,515     |   |
|                                                  |   | **(95,464)**  | **)**         | (105,710   |   |
|                                                  |   |          | ** **    |       |   |
| **Loss before income taxes**                          |   | **(434,161**  | **)**         | (308,768   | )      |
|                                                  |   |          | ** **    |       |   |
| Income tax benefit                                    |   | **46,738**    | ** **    | 95,584     |   |
| **Net loss**                                          |   | **$**         | **(387,423**  | **)**      | $      | (213,184 | ) |
|                                                  |   |          | ** **    |       |   |
| Earnings (loss) per share data:                       |   |          | ** **    |       |   |
| Basic                                                 |   | **$**         | **(0.13**     | **)**      | $      | (0.07 | ) |
| Diluted                                               |   | **(0.13**     | **)**         | (0.07      | )      |
|                                                  |   |          | ** **    |       |   |
| Weighted-average number of common shares outstanding: |   |          | ** **    |       |   |
| Basic                                                 |   | **2,955,872** | ** **    | 2,946,464  |   |
| Diluted                                               |   | **2,955,872** | ** **    | 2,946,464  |   |
|                                                  |   |          | ** **    |       |   |
|                                                  |   |          | ** **    |       |   |

#### **See Notes to the InterimFinancial Statements**

 

 

#### **WINLAND ELECTRONICS, INC.**

**STATEMENTS OF INCOME**

**For theNine Months Ended September 30, 2001 and 2000**

**(UNAUDITED)**

** **

 
|                                                  |   | **2001**       |           | **2000**   |   |
|-------------------------------------------------------|--------|----------------|----------------|------------|--------|
|                                                  |   |           | ** **     |       |   |
| Net sales                                             |   | **$**          | **11,551,162** | ** ** | $      | 13,981,273 |   |
| Cost of sales                                         |   | **9,691,157**  | ** **     | 11,634,412 |   |
| **Gross profit**                                      |   | **1,860,005**  | ** **     | 2,346,861  |   |
|                                                  |   |           | ** **     |       |   |
| Operating expenses:                                   |   |           | ** **     |       |   |
| General and administrative                            |   | **1,301,829**  | ** **     | 1,019,387  |   |
| Research and development                              |   | **675,328**    | ** **     | 792,303    |   |
| Marketing                                             |   | **540,911**    | ** **     | 448,538    |   |
|                                                  |   | **2,518,068**  | ** **     | 2,260,228  |   |
|                                                  |   |           | ** **     |       |   |
| **Operating income (los4s)**                          |   | **(658,063**   | **)**          | 86,633     |   |
|                                                  |   |           | ** **     |       |   |
| Other income (expenses):                              |   |           | ** **     |       |   |
| Interest expense                                      |   | **(391,920**   | **)**          | (334,270   | )      |
| Other income, net                                     |   | **26,312**     | ** **     | 75,202     |   |
|                                                  |   | **(365,608**   | **)**          | (259,068   |   |
|                                                  |   |           | ** **     |       |   |
| **Loss before income taxes**                          |   | **(1,023,671** | **)**          | (172,435   | )      |
|                                                  |   |           | ** **     |       |   |
| Income tax benefit                                    |   | **252,738**    | ** **     | 41,400     |   |
| **Net loss**                                          |   | **$**          | **(770,933**   | **)**      | $      | (131,035 | ) |
|                                                  |   |           | ** **     |       |   |
| Earnings (loss) per share data:                       |   |           | ** **     |       |   |
| Basic                                                 |   | **$**          | **(0.26**      | **)**      | $      | (0.04 | ) |
| Diluted                                               |   | **(0.26**      | **)**          | (0.04      | )      |
|                                                  |   |           | ** **     |       |   |
| Weighted-average number of common shares outstanding: |   |           | ** **     |       |   |
| Basic                                                 |   | **2,953,525**  | ** **     | 2,932,511  |   |
| Diluted                                               |   | **2,953,525**  | ** **     | 2,932,511  |   |
|                                                  |   |           | ** **     |       |   |
|                                                  |   |           | ** **     |       |   |

#### **See Notes to the InterimFinancial Statements**

 

 

#### **WINLAND ELECTRONICS, INC.**

**STATEMENTS OF CASH FLOWS**

**For theNine Months Ended September 30, 2001 and 2000**

**(UNAUDITED)**

** **

** **

 
|                                                                                      |   | **2001**       |              | **2000**   |           |
|-------------------------------------------------------------------------------------------|--------|----------------|-------------------|------------|----------------|
| **Cash  Flows From Operating Activities**                                                 |   |           | ** **        |       |           |
| Net loss                                                                                  |   | **$**          | **(770,933**      | **)**      | $              | (131,035 | ) |
| Adjustments to  reconcile net loss to net cashprovided by (used in) operating activities: |   |           | **   ** |       |      |
| Depreciation and  amortization                                                            |   | **599,374**    | ** **        | 625,025    |           |
| Loss on disposal  of equipment                                                            |   | **10,954**     | ** **        | 350        |           |
| Changes in  assets and liabilities:                                                       |   |           | ** **        |       |           |
| Accounts and  notes receivable                                                            |   | **1,292,846**  | ** **        | (653,166   | )              |
| Income taxes  receivable                                                                  |   | **(121,923**   | **)**             | (91,852    | )              |
| Inventories                                                                               |   | **2,389,072**  | ** **        | (1,577,061 | )              |
| Prepaid expenses                                                                          |   | **(60,743**    | **)**             | (90,382    | )              |
| Accounts payable                                                                          |   | **(1,337,041** | **)**             | 1,074,992  |           |
| Accrued  expenses, including deferred revenue                                             |   | **7,070**      | ** **        | (157,456   | )              |
| **Net  cash provided by (used in) operating activities**                                  |   | **2,008,676**  | ** **        | (1,000,585 | )              |
|                                                                                      |   |           | ** **        |       |           |
| **Cash  Flows From Investing Activities**                                                 |   |           | ** **        |       |           |
| Purchases of  property and equipment                                                      |   | **(49,576**    | **)**             | (268,718   | )              |
| Proceeds from  sale of equipment                                                          |   | **18,150**     | ** **        | 2,190      |           |
| **Net  cash used in investing activities**                                                |   | **(31,426**    | **)**             | (266,528   | )              |
|                                                                                      |   |           | ** **        |       |           |
| **Cash  flows From Financing Activities**                                                 |   |           | ** **        |       |           |
| Net borrowings  (payments) on revolving credit agreement                                  |   | **(1,305,000** | **)**             | 1,730,000  |           |
| Payments on long-term  borrowings, including capitallease obligations                     |   | **(567,026**   | **)**             | (520,597   | )              |
| Proceeds from  issuance of common stock                                                   |   | **3,782**      | ** **        | 66,965     |           |
| **Net  cash provided by (used in) financing activities**                                  |   | **(1,868,244** | **)**             | 1,276,368  |           |
|                                                                                      |   |           | ** **        |       |           |
| **Net  increase in cash**                                                                 |   | **109,006**    | ** **        | 9,255      |           |
|                                                                                      |   |           | ** **        |       |           |
| **Cash**                                                                                  |   |           | ** **        |       |           |
| Beginning                                                                                 |   | **38,961**     | ** **        | 40,017     |           |
| End                                                                                       |   | **$**          | **147,967**       | ** ** | $              | 49,272 |   |
|                                                                                      |   |           | ** **        |       |           |
| **Supplemental  Disclosures of Cash Flow Information**                                    |   |           | ** **        |       |           |
| Cash payments  (refunds) for:                                                             |   |           | ** **        |       |           |
| Interest                                                                                  |   | **$**          | **392,139**       | ** ** | $              | 330,498 |   |
| Income taxes                                                                              |   | **(130,815**   | **)**             | 50,453     |           |
|                                                                                      |   |           | ** **        |       |           |

#### **See Notes to Interim Financial Statements**

#### ** **

####  

**WINLANDELECTRONICS, INC.**

**NOTES TO THE INTERIM FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

 

**Note1.     Basis of Presentation**

 

The accompanying unaudited financial statements have been prepared bythe Company in accordance with generally accepted accounting principles in theUnited States of America, pursuant to the rules and regulations of theSecurities and Exchange Commission.  Inmanagement's opinion all adjustments necessary for a fair presentation of theresults for the interim period have been reflected in the interim financialstatements.  The results of operationsfor any interim period are not necessarily indicative of the results for a fullyear.  All adjustments to the financialstatements are of a normal recurring nature. Certain information and footnote disclosures normally included infinancial statements have been condensed or omitted. Such disclosures are thosethat would substantially duplicate information contained in the most recent auditedfinancial statements of the Company, such as significant accounting policies,lease and license commitments and stock options.Management presumes that usersof the interim statements have read or have access to the audited financialstatements included in the Company's most recent annual report on Form 10-KSB.

 

 

**Note2.     Inventories**

 

Major components of inventory at September 30, 2001 and December 31,2000 are as follows:

 

 
|                  |   | **September  30,** |      | **December 31,** |   |
|-----------------------|--------|--------------------|-----------|------------------|--------|
|                  |   | **2001**           |      | **2000**         |   |
| Raw Materials         |   | $                  | 1,909,033 |             | $      | 4,713,476 |   |
| Work In Process       |   | 311,849            |      | 288,991          |   |
| Finished Goods        |   | 718,746            |      | 319,562          |   |
| Obsolescence  reserve |   | (58,671            | )         | (52,000          | )      |
| Total                 |   | $                  | 2,880,957 |             | $      | 5,270,029 |   |
|                  |   |               |      |             |   |

 

 

**Note3.     Financing Arrangement**

 

The Company had a $4,500,000 revolving line-of-credit agreement throughAugust, 2001 of which $3,500,000 has been extended until November 30,2001.  Interest on advances is at** **the bank'sreference rate (6.5 percent at September 30, 2001) and is due monthly. Advancesoutstanding on therevolving line-of-credit agreement at September 30, 2001and December 31,2000, were$2,619,501 and $3,924,501, respectively.

 

Advances are due on demand, are secured by substantially all assets ofthe Company, and aresubject to a defined borrowing base equal to 80 percent of qualifiedaccounts receivable and 60percent of eligible inventories and 25 percent of work in process.  In addition, the agreement contains certainreporting and operating covenants.   Thebank has waived the Company's compliance with certain covenants until December31, 2001.

 

The Company is currently discussing various options to meet and securethe future financial needs of the Company.

 

**Note4.     Stock Options**

 

As of September 30, 2001, options to purchase 313,000 shares of commonstock were outstanding under the Company's 1989 and 1997 Stock Option Plans, ofwhich 216,400 shares were exercisable. At September 30,  2001, theexercise prices of all outstanding options range from $1.75 to $2.938 pershare. 

 

 

**Note5.     Major Customers andEnterprisewide Disclosures**

 

**Major Customers**:The Company has customers that accounted for more than 10 percent of net salesfor the three months and nine months ended September 30, 2001, and 2000, asfollows:

 
|                   |   |                    |   |                    |   |
|------------------------|--------|-------------------------|--------|-------------------------|--------|
|                   |   | **Three Months Ended**  |   | **Three Months Ended**  |   |
|                   |   | **September  30, 2001** |   | **September  30, 2000** |   |
| **Sales  percentage:** |   |                    |   |                    |   |
| Customer A             |   | 35                      | %      | 32                      | %      |
| Customer B             |   | 16                      | %      | 13                      | %      |
| Customer C             |   | 3                       | %      | 27                      | %      |
| Customer D             |   | 11                      | %      | 6                       | %      |

 

 
|                   |   | **Nine Months Ended**   |   | **Nine Months Ended**   |   |
|------------------------|--------|-------------------------|--------|-------------------------|--------|
|                   |   | **September  30, 2001** |   | **September  30, 2000** |   |
| **Sales  percentage:** |   |                    |   |                    |   |
| Customer A             |   | 31                      | %      | 36                      | %      |
| Customer B             |   | 15                      | %      | 18                      | %      |
| Customer C             |   | 19                      | %      | 19                      | %      |
|                   |   |                    |   |                    |   |

 

 

**Enterprisewide Disclosures:**Thefollowing table presents three month and nine month revenues from externalcustomers for each of the Company's groups of products and services:

 
|                                                                         |          |                    |      |                    |   |
|------------------------------------------------------------------------------|---------------|-------------------------|-----------|-------------------------|--------|
|                                                                         |          | **Three Months Ended**  |      | **Three Months Ended**  |   |
|                                                                         |          | **September  30, 2001** |      | **September  30, 2000** |   |
| Proprietary  microprocessors and mechanically  controlled sensors and alarms |          | $                       | 753,585   |                    | $      | 695,351 | * |
| Electronic  controls and assemblies for  OEM customers                       |     | 2,441,995               |      | 3,963,264               |   |
|                                                                         |          | $                       | 3,195,580 |                    | $      | 4,658,615 |   |

 

 
|                                                                         |   | **Nine Months Ended**   |       | **Nine Months Ended**   |   |
|------------------------------------------------------------------------------|--------|-------------------------|------------|-------------------------|--------|
|                                                                         |   | **September  30, 2001** |       | **September  30, 2000** |   |
| Proprietary  microprocessors and mechanically  controlled sensors and alarms |   | $                       | 2,072,083  |               | $      | 2,010,142 |   * |
| Electronic  controls and assemblies for  OEM customers                       |   | 9,479,079               |       | 11,971,131              |   |
|                                                                         |   | $                       | 11,551,162 |                    | $      | 13,981,273 |   |

 

----

* DC Motor Control sales of $103,924 for the nine months ended  September 30, 2000, were previously reportedas OEM sales. 

 

**Note6.     Earnings (Loss) per Share**

 

Basic per-share amounts are computed, generally, by dividing net incomeor loss by the weighted-average number of common shares outstanding.  Diluted per-share amounts assume theconversion, exercise, or issuance of all potential common stock instrumentsunless the effect is antidilutive.

 

The Company has granted options to purchase shares of common stock atvarious amounts per share.  Thoseoptions were not included in the computation of diluted earnings per sharebecause the Company incurred a year-to-date loss.  The inclusion of potential common shares in the calculation ofdiluted loss per share would have an antidilutive effect.  Therefore, basic and diluted loss per shareamounts are the same in each period presented for 2001.

 

 

**Note7.     Additional Expenditures**

 

Included in the general and administrative expenses for the threemonths and nine months ended September 30, 2001 are expenses which are not partof Winland's normal operating expenses.  In connection with the resignation of Winland's former Chief ExecutiveOfficer, W. Kirk Hankins, and the termination of his employment agreement, theCompany entered into a Separation Agreement and Release.  Under the terms of the agreement an obligationof $205,591 was accrued in its entirety on May 31, 2001.  This executive severance package will bepaid out in the form of compensation through May 2002 and insurance throughNovember 2002.  There will be no futureobligations in connection with W. Kirk Hankins' Separation Agreement andRelease.

 

In addition, the Company has incurred legal, proxy solicitor, directorand other professional fees in the amount of $145,754 and $232,438 during thethree and nine months ended September 30, 2001, respectively, in connectionwith the August 21, 2001 Special Shareholders' Meeting requested by dissidentshareholder, Dyna Technology, Inc.  TheCompany does not anticipate significant additional costs to be incurred  in connection with the August 21, 2001Special Shareholders' Meeting.

 

 

**Note8.     Accounting Standards Issued NetYet Adopted **

 

In July 2001, the Financial Accounting Standards Board issued two newstatements. Statement No. 141, Business Combinations, eliminates the poolingmethod of accounting for business combinations. Statement No. 142, Goodwill andOther Intangible Assets, eliminates the amortization of goodwill and otherintangibles that are determined to have an indefinite life and requires, at aminimum, annual impairment tests of goodwill and other intangible assets thatare determined to have an indefinite life. The Company has not yet completedits full assessment of the effect of these new standards on its consolidatedfinancial statements, but believes their impact will not be significant. Thestandards generally are required to be implemented by the Company in its 2002financial statements.

 

#### **ITEM 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATION**

 

#### **RESULTS OFOPERATIONS**

**Three and nine months ended September30, 2001 v.**

**Three and nine months ended September30, 2000**

 

Net Sales:  The Company recorded net sales of $3,195,580 for the three monthsended September 30, 2001, a decline of $1,463,035 from $4,658,615 for the sameperiod in 2000.  For the first ninemonths of 2001 the Company recorded net sales of $11,551,162, a decline of$2,430,111 from $13,981,273 for the same period in 2000.  The reduction in sales for the quarter endedSeptember 30, 2001 is primarily attributed to a reduction in sales to PeopleNetCommunications.  The Company negotiateda release of its agreement with PeopleNet Communications for production of itsbase unit in mid August 2001.  TheCompany will continue to supply manufacturing services to PeopleNet, but in areduced capacity.  The Company alsoexperienced a reduction in sales for the first nine months of 2001 compared to2000, which is attributed to lower sales to other OEM customers. This declineis attributable to reduced demand consistent with the broader slowing of theeconomy.  Sales of the Company’ssecurity/industrial proprietary products increased slightly for both thequarter and first nine months of 2001.

 

The Company currently hasorders and forecasts from its major OEM customers for delivery during theremainder of 2001 having an aggregate value of $2.8 million, as well aspurchase agreements for 2002 of $1.8 million. These are at various stages of completion.  The Company expects to receive additional orders from current OEMcustomers for 2001 and 2002 production, including four new customers obtainedin the third quarter of 2001.

 

The Company has continuedto position itself as a full service designer and manufacturer of customcontrols and assemblies for OEM customers. The Company has begun to explore additional geographic regions to marketits OEM services, primarily through networking with referral sources in theChicago area. The loss of any significant OEM customer would likely have anadverse effect on the Company’s short-term, and potentially long-term, results.

 

Gross Profits:  Gross profit was $517,554 or 16.2% of netsales for the three months ended September 30, 2001, compared to $503,598 or10.8% of net sales for the same period in 2000.  For the first nine months of 2001 the gross profit was $1,860,005or 16.1% of net sales, a decline from $2,346,861 or 16.8% of net sales for thesame period in 2000.  The increase ingross profits for the quarter and the relatively constant gross profits for thefirst nine months of 2001, compared to 2000, are primarily attributed to theCompany’s ability to reduce direct and variable indirect expenses as salesdeclined for both periods, offset in part by the reallocation of certainexpenses into the cost of goods sold.

 

Operating Expenses:  General and administrative expense was$453,837 or 14.2% of net sales and $1,301,829 or 11.3% of net sales for thethree and nine months ended September 30, 2001, compared to $271,878 or 5.8% ofnet sales and $1,019,387 or 7.3% for the same periods in 2000, respectively.The increase in general and administrative expenses for the third quarter andfirst nine months of 2001 is attributed primarily to expenses related to theexecutive severance package and increased professional and boardfees, related to the August21, 2001 special shareholders meeting, offset in part by the reallocation ofcertain expenses, primarily relating to facility, information technology andleased vehicles, to better match costs with departmental use.   The executive severance package of $205,591was incurred in May 2001 in connection with the resignation of W. Kirk Hankins,the former Chief Executive Officer. Expenses for the August 21, 2001 SpecialShareholders’ Meeting were $145,754 and $232,438 for the three and nine monthsended September 30, 2001, respectively.

 

Marketing and customer relationsexpense (including project management) was $189,363 or 5.9% of net sales and$540,911 or 4.7% of net sales for the three and nine months ended September 30,2001, compared to $143,348 or 3.1% of net sales and $448,538 or 3.2% of netsales for the same periods in 2000, respectively. During both the three andnine months ended September 30, 2001, the increase in marketing and customerrelations expense is primarily attributable to the reallocation of facility,information technology, and marketing vehicle expenses to better matchdepartmental use, and to a lesser degree, increased employee costs from thereassignment of certain personnel to project management, offset in part bydecreased trade show and promotional expenses.

For the first nine monthsof 2001, marketing and sales efforts have shifted slightly away from thegeneral exposure afforded by trade shows and towards building direct personalcontacts with potential OEM customers and in developing an extensive referralnetwork.  Management believes thatbuilding these relationships will provide Winland an opportunity to capture alarger share of the EMS (Electronic Manufacturing Services) market.

 

Research and developmentexpense (including the development of new company products as well as designservices and support to the OEM customer base)was $213,051 or 6.7% of net sales and$675,328 or 5.8% of net sales for the three and nine months ended September 30,2001, compared to $291,430 or 6.3% of net sales and $792,303 or 5.7% of netsales for the same periods in 2000.  Thedecline in research and development expense for both the three and nine monthsended September 30, 2001 compared to 2000 is primarily attributable to employeeattrition and reassignment without replacement.  Accordingly, total salaries and related expenses decreased, butwere offset in part by the reallocation of facility, information technology andleased vehicle expenses to this department, in order to properly reflect actualusage.

 

Interest Expense:  Interest expense was $109,520 or 3.4% of netsales and $391,920 or 3.4% of net sales for the three and nine months endedSeptember 30, 2001 compared to $122,225 or 2.6% and $334,270 or 2.4% of netsales for the same periods in 2000, respectively.  The reduction in interest expense for the third quarter of 2001was attributed to a reduction in long-term debt and lower interest rates onshort-term debt, offset in part by increases in borrowings on short-termdebt.  The increase in interest expensefor the nine months ended September 30, 2001 is the result of increased averagelevels of short-term debt, offset in part by reductions in long-term debt andlower interest rates on short-term debt. The Company has paid down $1,305,000 on it’s line-of-credit and paiddown $567,026 on long-term debt during the first nine months of 2001, all ofwhich was generated from its operating activities.

 

Net Earnings:  The Company reported a net loss of  $387,423 or ($0.13) per basic and dilutedshare and a net loss of $770,933 or ($0.26) per basic and diluted share for thethree and nine months ended September 30, 2001, compared to a net loss of  $213,184 or ($0.07) per basic and dilutedshare and a net loss of $131,035 or ($0.040 per basic and diluted share for thesame periods in 2000, respectively.   The net loss for the third quarter and first nine months of 2001are primarily due to the lower sales volumes and the $438,000 additionalexpenses incurred in association with the resignation of the Company’s formerChief Executive Officer, and fees and expenses related to the August 21, 2001Special Shareholders’ Meeting.  Inaddition, the company paid out $17,500 severance pay to employees terminated inSeptember 2001.

 

The Company believesinflation has not significantly affected its results of operations.

 

The Company uses a 35%blended federal and state income tax rate and recognizes an estimated taxbenefit from the potential carry back of 2001 losses generated to date tooffset taxable income created in previous years.  As of September 30, 2001 the Company has absorbed all tax carryback benefits with the net losses incurred to date.

 

 

##### **LIQUIDITY AND CAPITAL RESOURCES**

 

Cash provided byoperating activities was $2,008,676 for the nine months ended September, 2001,compared to cash used for operating activities of $1,000,585 for the sameperiod in 2000, an improvement of $3,009,261. Cash provided by operations was used to pay down $1,305,000 of theCompany’s revolving line-of-credit (a reduction of over 33%), reduce long-termdebt and to a lesser degree, for the purchase of equipment.   The Company has funded its currentoperations with working capital provided by operations.

 

The current ratio atSeptember 30, 2001 and December 31, 2000 was 1.3 to 1.  Working capital equaled $1,507,949 onSeptember 30, 2001, compared to $2,074,820 on December 31, 2000.  The decrease in working capital isattributed to reductions in accounts receivable and inventory, as well asincreases in other accrued expenses, offset, in part, by increased income taxreceivable and prepaid expenses and decreased accounts payable and short-termborrowings.

The Company has a$3,500,000 revolving line-of-credit agreement with Wells Fargo Bank, throughNovember 2001.  Interest on advances isat the bank’s reference rate (6.5 percent at September 30, 2001) and is duemonthly. Advances outstanding on the revolving line-of-credit at September 30,2001 and December 31, 2000 were $2,619,501 and $3,924,501, respectively.  Advances are due on demand, are secured bysubstantially all assets of the Company, and are subject to a defined borrowingbase equal to 80 percent of qualified accounts receivable and 60 percent ofeligible inventory plus 25 percent of work in process.  In addition, the line-of-credit agreementcontains certain reporting and operating covenants.

 

The Company has maintained financing arrangements with Wells Fargo Banksince February of 1996.  In the fall of2000, the Company increased the maximum loan amount under its line-of-creditagreement with Wells Fargo Bank to $4,500,000 from the $3,500,000 level whichhad been in place throughout 2000, to address working capital demands largelyattributable to increased production for one of the Company’s keycustomers.  At December 31, 2000, the Companywas in violation of certain covenants under the line-of-credit agreement andWells Fargo Bank waived the covenants through December 31, 2001.  The Company and Wells Fargo Bank agreed toextendthe line ofcredit from August 31, 2001throughNovember 30, 2001, with a reduced maximum loan amount of $3,500,000, on theterms described above.

 

The Company is engaged in discussions with Wells Fargoand other financing sources to provide financing beyond November 30, 2001.  There is no assurance that the Company willbe successful in obtaining financing arrangements on terms acceptable to theCompany.  The Company may find itnecessary to accept financing arrangements which limit the Company’s ability toachieve growth.

 

 

#### **ADDITIONALINFORMATION**

 

During the second quarterof 2001, the Company engaged the Value Enhancement Solutions team of RSMMcGladrey, Inc. to facilitate continuing efforts in comprehensive corporatestrategic planning with the management team and board of directorsof Winland Electronics,Inc.  This is especially crucial duringthis current economic downturn.

 

 

**CAUTIONARYSTATEMENTS**

** **

Certain statements contained in this Quarterly Report on Form 10-QSBand other written and oral statements made from time to time by the Company donot relate strictly to historical or current facts.  As such, they are considered “forward-looking statements” whichprovide current expectations or forecasts of future events.  Such statements can be identified by the useof terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,”“may,” “could,” “possible,” “plan,” “project,” “should,” “will,” “forecast” andsimilar words or expressions.  TheCompany’s forward-looking statements generally relate to the Company’s growthstrategies, financial results, product development and sales efforts.  One must carefully consider forward-lookingstatements and understand that such statements involve a variety of risks anduncertainties, known and unknown, and may be affected by inaccurateassumptions, including, among others, those discussed below.  Consequently, no forward-looking statementcan be guaranteed and actual results may vary materially.  As provided for under the Private SecuritiesLitigation Reform Act of 1995, the Company wishes to caution investors that thefollowing important factors, among others, in some cases have affected and inthe future could affect the Company’s actual results of operations and causesuch results to differ materially from those anticipated in forward-lookingstatements made in this document and elsewhere by or on behalf of the Company.

The Company derives a significant portion of its revenues from a smallnumber of major OEM customers that are not subject to any long-term contractswith the Company.  If any major customershould for any reason decrease the volume of their business or stop doingbusiness with the Company, the Company’s business would be adverselyaffected.   Some of the Company’scustomers are not large, well-established companies, and the business of eachcustomer is subject to various risks such as market acceptance of new productsand continuing availability of financing. To the extent that the Company’s customers encounter difficulties, orthe Company is unable to meet the demands of its OEM customers, the Companycould be adversely affected.

 

The Company’s ability to increase revenues and profits is dependentupon its ability to retain existing customers and obtain new customers.  The Company competes for new customers withnumerous independent contract design and manufacturing firms in the UnitedStates and abroad, many of whom have greater financial resources and moreestablished reputations.  The Company’sability to compete successfully in this industry depends, in part, upon theprice at which the Company is willing to manufacture a proposed product and thequality of the Company’s design and manufacturing services.  There is no assurance that the Company willbe able to continue to obtain contracts from existing and new customers onfinancially advantageous terms, and the failure to do so could prevent theCompany from achieving the growth it anticipates.

 

The Company’s ability to execute its business plan to increase salesdepends upon the availability of sufficient financing, both equity and debt, tomeet fixed and variable costs associated with such growth.  In the current economic environment, banksand other sources of financing are becoming increasingly conservative in theirlending and investment policies.  Thereis no assurance that the Company will be able to obtain the financing necessaryto achieve its goals.

 

###### **PART II – OTHER INFORMATION**

 
| **ITEM  4.** | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS** |
|--------------|----------------------------------------------------------|
|         |                                                     |   |
|         | (a)                                                      | The Company held a Special Meeting of Shareholders  on August 21, 2001. |
|         |                                                     |   |
|         | (b)                                                      | Proxies for the Special Meeting were solicited pursuant  to Regulation 14A under the Securities Exchange Act of 1934.  The meeting was called upon a demand for a  special meeting received by the Company from Dyna Technology, Inc., a Utah  corporation solely owned by Ralph I. Call and his spouse, Nola D. Call, which  holds more than 10% of the Company’s outstanding Common Stock.  The business transacted at the Special  Meeting was limited to the following purpose given in Dyna Technology’s  demand: |
|         |
|         |                                                     | To simultaneously remove all incumbent directors  from the Board of Directors of the Company and to elect all of the following  individuals to serve as directors of the Company: |
|         |                                                     |   |
|         |                                                     |   | Ralph I. Call | James J. Kamp | Robert L. Ring |
|         |                                                     |   | Steven A. Fraley | Thompson H. Davis | Gerald E. Brown |
|         |                                                     |   | Paul R. Holzhueter |   |   |
|         |                                                     |   |   |   |   |
|         |                                                     | Dyna  Technology’s proposal failed.  The  results of the vote taken at such meeting as reported and certified by  Corporate Election Services were as follows: |

 
|   | **Nominees**       | **FOR**   | **AGAINST** | **WITHHOLD** |
|--------|--------------------|-----------|-------------|--------------|
|   |               |      |        |         |
|   |               |      |        |         |
|   | Ralph I. Call      | 1,163,072 | 1,339,711   | 14,317       |
|   |               |      |        |         |
|   | Steven A. Fraley   | 1,162,172 | 1,340,611   | 14,317       |
|   |               |      |        |         |
|   | Paul R. Holzhueter | 1,162,692 | 1,340,091   | 14,317       |
|   |               |      |        |         |
|   | James J. Kamp      | 1,161,392 | 1,341,391   | 14,317       |
|   |               |      |        |         |
|   | Thompson H. Davis  | 1,160,472 | 1,342,311   | 14,317       |
|   |               |      |        |         |
|   | Robert L. Ring     | 1,161,392 | 1,341,391   | 14,317       |
|   |               |      |        |         |
|   | Gerald E. Brown    | 1,163,342 | 1,339,441   | 14,317       |

 
|        | (c)                                  | Messrs. Call, Kamp, Davis, Ring and Brown chose not  to attend the meeting.                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|-------------|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                                 | All of the Company’s directors were in attendance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|        |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|        |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **ITEM 6.** | **EXHIBITS AND REPORTS ON FORM 8-K** |
|        |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|        | (a)                                  | Exhibits.   None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|        |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|        | (b)                                  | Reports on Form 8-K.  During  the quarter ended September 30, 2001, the Company filed Forms 8-K dated (i)  August 21, 2001 to announce that the Company’s shareholders voted against a  proposal by Dyna Technology, Inc. to remove the Company’s directors and elect  a new board of directors at a special meeting held on August 21, 2001 and  (ii) September 11, 2001 to report that the Company sent a letter to its  shareholders to inform them about the result of the special meeting held on  August 21, 2001. |

 

**SIGNATURES**

 

                Pursuant to therequirements of Section 13 of the Securities Exchange Act of 1934, the Companyhas caused this Report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|                          |   | WINLAND  ELECTRONICS, INC.                                                                                       |
|-------------------------------|--------|------------------------------------------------------------------------------------------------------------------|
|                          |   |                 (“Company”) |
|                          |   |                                                                                                             |
|                          |   |                                                                                                             |
|                          |   |                                                                                                             |
| Dated:  October 31, 2001 |   | /s/  Lorin E. Krueger                                                                                            |
|                          |   | Lorin E.  Krueger, President and Chief Executive Officer (Principal Executive Officer)                           |
|                          |   |                                                                                                             |
|                          |   |                                                                                                             |
|                          |   |                                                                                                             |
|                          |   | /s/  Jennifer A. Thompson                                                                                        |
|                          |   | Jennifer  A. Thompson, Chief Financial Officer (Principal Financial and Accounting  Officer)                     |