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, 1995 Commission File No.: 0-15471
WINLAND ELECTRONICS, INC.
(Name of small business issuer in its charter)
Minnesota 41-0992135
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1950 Excel Drive, Mankato, Minnesota 56001
(Address of principal executive offices)
(507) 625-7231
(Issuer's telephone number)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
------------------------
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Issuer was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes X No_______
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for fiscal year ended December 31, 1995: $5,850,724
The aggregate market value of the Common Stock held by non-affiliates as of
March 14, 1996 was approximately $5,310,110 based on the closing sale price of
the Issuer's Common Stock on such date.
There were 2,583,311 shares of Common Stock, $.01 par value, outstanding as of
March 14, 1996.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference pursuant to Rule 12b-23: Portions of the
Company's Proxy Statement for its 1996 Annual Meeting are incorporated by
reference into Items 9, 10, 11 and 12 of Part III.
Transitional Small Business Disclosure Format (check one) Yes No X
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Winland Electronics, Inc. (the "Company") was incorporated as a
Minnesota corporation in October of 1972. Before 1985, the Company derived most
of its revenues from the sale to farms and businesses of security devices which
monitor and detect temperature, power failure, water leakage and other
environmental emergencies. In 1984, in a effort to diversify its business, the
Company began to develop and manufacture products for other companies on a
contract basis.
Products
The Company currently designs, produces and distributes products in two
product categories defined as "Contract Design and Manufacturing" and
"Security/Industrial Products."
Contract Design and Manufacturing. The Company's contract design and
manufacturing services include design and production engineering, material
sourcing, various levels of product assembly, field repair services, and
warehousing and shipping services. Customers may select any combination of the
services offered. The Company provides contract design and manufacturing
services to four key customers, Johnson World Wide Associates, Inc., formerly
Johnson Fishing, Inc. ("JWA"), CIC Systems, Inc. ("CIC"), Scotsman Industries,
Inc. ("Scotsman"), and American Harvest Inc. ("American Harvest"). The Company
has manufactured products for CIC for over six years and currently serves as the
only manufacturer for CIC; however, it does not have a formal agreement with CIC
which guarantees exclusivity to the Company. There is no assurance that the
Company will continue to be engaged by any of these contract design and
manufacturing customers. Contract design and manufacturing accounted for
approximately 73% of the Company's total sales during 1995 and 1994.
Security/Industrial Products. The Company is a supplier of simple and
sophisticated microprocessor and mechanically controlled sensors and alarms.
These products monitor and detect environmental changes, such as changes in
temperature, humidity, water leakage and power failures. With the Company's
"ALERT" series of products, many burglar or fire alarm panels can be converted
to monitor and report unfavorable environmental conditions. Security/industrial
product sales accounted for approximately 27% and 26% of the Company's sales for
1995 and 1994, respectively.
Marketing and Distribution
The Company markets its contract design and manufacturing services
primarily through direct telephone contact and mail solicitation of potential
customers. The Company markets its security/industrial products in a variety of
ways, including through an established security distribution network,
instrumentation catalogs, direct mail order companies, and national and regional
trade expositions. In 1993, the Company added exhibits in the HVAC (Heating,
1
<PAGE>
Ventilating, Air Conditioning), Refrigeration, and Industrial Industries
national and regional trade expositions. The Company intends to continue to
expand its advertising efforts in 1996 in all areas of opportunity. The
Company's primary distribution outlet for the security/industrial products is a
network of over 300 distributors.
Source of Materials
The components and subassemblies which are included in products
manufactured by the Company are purchased from outside vendors and then tested
and incorporated into the products by the Company's manufacturing assembly
personnel. Certain purchased components and subassemblies are manufactured to
design specifications furnished by the Company, while others are standard
off-the-shelf items. The Company has multiple sources for the off-the-shelf
components, but generally maintains only one source for items manufactured to
design specifications. If the Company were to lose one or more of its major
suppliers, some delay and 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 a new source.
Patents, Trademarks and Licenses
The Company holds federal trademark registrations for marks used in the
Companies business as follows: WATERBUG(R) and ENVIRONMENTAL SECURITY(R).
Seasonality and Working Capital
The seasonality of the Company's business is dependent in part on the
products produced for the contract design and manufacturing customers. Since
1985, the Company has experienced increased working capital demands in the
fourth quarter as production of various contract manufacturing products
increases to meet spring orders. Changes in the types of products produced in
the contract design and manufacturing portion of the Company's business could
materially affect seasonality and the timing of working capital requirements.
Significant Customers
Contract design and manufacturing services provided to JWA accounted for
approximately 27% and 12% of the Company's sales during the years ended December
31, 1995 and 1994. Contract design and manufacturing services provided to CIC
accounted for approximately 17% and 31% of total sales for the years ended
December 31, 1995 and 1994. Contract manufacturing services for American Harvest
were 11% and 18% of total sales for the years ended December 31, 1995 and 1994.
The Company expects to complete the American Harvest project in the first
quarter of 1996. The loss of any contract customer could have an adverse effect
on the Company's short-term results. The management of the Company believes that
the contract design and manufacturing portion of its business has potential for
growth and is actively promoting this portion of the business.
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Backlog and Government Contacts
The Company has no significant backlog of orders at the fiscal year
end. The Company had no government contracts.
Competition
The Company's business includes the development and marketing of
security/industrial products and those produced for other companies(contract
design and manufacturing). Among the security/industrial products, competition
has increased in the last two years as additional companies have introduced
competing products. The Company believes, however, that its products offer
desirable features at competitive prices. Despite the increased competition, the
sales of security/industrial products increased 13% for 1995 over 1994. The
Company has continued to stress the development of new products and the
enhancement of existing products to meet the customers' changing needs.
The competition for the contract design and manufacturing services
offered by the Company has increased substantially, both domestically and
internationally. To enhance its ability to compete effectively, the Company has
invested in additional capital equipment to increase automation of the
production process. The Company has also positioned itself to offer a more
complete range of services than is available from the typical electronic "board"
house. These efforts have proven to be successful in 1995.
Research and Development
The technology in the retail electronics industry in evolving rapidly
and likely will result in the development of new products and systems which may
make the Company's present products obsolete. In order to remain competitive,
the Company believes that it will be required to continually upgrade and improve
existing products and develop new ones. The Company has continued to identify
opportunities to enhance existing products and develop new products to meet the
changing needs in the marketplace. The Company spent $209,918 and $174,676 on
research and development, which represented 4% and 3% as a percentage of sales,
during 1995 and 1994, respectively. Some of the research and development costs
are recovered through the billing of costs that are directly related to contract
design and activities. There is no assurance that the Company's research and
development activities will lead to the development of new products or that such
products, if developed, will be marketed successfully.
Effect on Environmental Regulations
To the extent that the Company's management can determine, there are no
federal, state, or local provisions regulating the discharge of materials into
the environment or otherwise relating to the protection of the environment with
which compliance by the Company has had, or is expected to have, a material
effect upon the capital expenditures, earnings, or competitive position of the
Company.
3
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Foreign Operations and Export Sales
The Company has not received any significant revenues from sales
outside of the United States during the last two fiscal years.
Personnel
At December 31, 1995, the Company had 72 employees, of which all but
one are full-time employees. The employees include four officers, one sales
person, one customer service employee, one secretarial support person, 47
production employees, including technicians and supervisors, three shipping and
receiving employees, three accounting and administrative employees, two
purchasing employees, eight research and development employees, one quality
assurance employee, one management information systems employee, and one
part-time product equipment specialist. The Company also uses temporary labor
services extensively for peak production purposes. The Company is not subject to
a collective bargaining agreement, and it considers its relations with its
employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
For part of 1995, the Company's offices and production facilities
consisted of 15,000 square feet of space located in a light industrial building
located in Mankato, Minnesota, leased month to month at a monthly rate of
$2,420. In addition, the Company temporarily leased an additional 14,000 square
feet of space in Mankato on a month to month basis at the monthly rate of
$2,917. During 1994, the Company began construction of a new facility to house
the office, manufacturing and warehouse activities. In February of 1995, the new
facility was completed and the Company's operations were moved. The funding of
the new facility, site and site improvements was acquired through a $1,700,000
building loan from the city of Mankato, a $500,000 state small cities loan, also
payable to the city of Mankato, and $270,000 from the city of Mankato in the
form of tax increment financing. The mortgage is payable in equal monthly
installments of $16,200 for both loans until January 1, 2000, at which time it
may be necessary for the Company to renew the financing on the building.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders of the
Company during the fourth quarter of 1995.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the Nasdaq SmallCap
Market under the symbol WLET since May 26, 1995. Prior to that date, the
Company's Common Stock was traded on the national over-the-counter bulletin
board. The following table sets forth the high and low bid prices, as reported
by either the Nasdaq SmallCap Market or the National Quotation Bureau
Incorporated of Jersey City, New Jersey or Metro Data Company of Minneapolis,
Minnesota. The bid quotations represent interdealer prices and do not include
retail mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions.
Fiscal Year Ended
December 31, 1995 Low High
First Quarter 1 7/8 2 7/8
Second Quarter 2 3/4 3 1/2
Third Quarter 2 3/4 3 1/2
Fourth Quarter 2 1/2 3 1/4
Fiscal Year Ended
December 31, 1994 Low High
First Quarter 1 1/8 1 3/4
Second Quarter 1 1/2 2 3/8
Third Quarter 1 1/2 2 1/4
Fourth Quarter 1 3/4 2 3/8
On March 14, 1996, the fair market value of the Company's Common Stock
was $2.75, based on the closing sale price on at that date. As of December 31,
1995, the Company had approximately 542 shareholders of record.
The Company has never paid cash dividends on its Common Stock. The
Board of Directors presently intends to retain earnings for use in the Company's
business and does not anticipate paying cash dividends on Common Stock in the
foreseeable future. Any future determinations as to the payment of dividends
will depend on the financial condition of the Company and such other factors as
are deemed relevant by the Board of Directors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Results of Operations - 1995 vs. 1994
Sales. Sales increased 8.4% to $5,850,724 for the year ended December 31,
1995 compared to $5,398,308 during the year ended December 31, 1994. The
increase in sales during 1995 was primarily due to a modest increase in the
value of shipments made to customers for whom the Company provides contract
design and manufacturing services. Also during 1995, the Company experienced
increased customer demand for its line of security/ industrial products,
resulting in a modest increase in sales of proprietary products compared to
1994.
5
<PAGE>
The Company believes that, for the foreseeable future, sales derived
from contract design and manufacturing services will grow at a faster rate than
sales from security/industrial products. Throughout the last year, management
has directed considerable attention toward expanding existing customer
relationships and securing new, long-term contract design and manufacturing
customer relationships. In connection with its objectives of securing additional
customers and expanding sales, in February of 1995, the Company relocated its
headquarters and operations to a new 55,000 square foot facility in Mankato,
Minnesota. Management believes that the expanded facility, which consolidated
all of the Company's operations in a single location, combined with the greater
production capacity and improved potential for efficiency, will make the
Company's services more marketable and allow it to secure additional sales both
from existing customers as well as prospective new customers in the area of
contract design and manufacturing.
Gross Profit. Gross Profit decreased from 28.1% of sales for the year
ended December 31, 1994 to 18.1% of sales for the year ended December 31, 1995.
The decline in gross profit was primarily the result of higher manufacturing
costs, which increased at a faster rate than the increase in sales. These higher
manufacturing costs consisted of: (1) higher fixed overhead costs associated
with the purchase of a 55,000 square foot facility; (2) the acquisition of new
manufacturing equipment and test equipment; (3) the cost of additional direct
and indirect labor and training required to support new equipment and expanded
manufacturing operations; and (4) manufacturing inefficiencies related to the
adjustment of personnel to new equipment and new manufacturing practices. During
1995, gross profit was also adversely affected by the disruption of
manufacturing operations during February 1995 as a result of the Company's
relocation to the new facility.
During 1995, the Company directed considerable attention toward the
objective of improving gross profit by: (1) expanding sales in order to absorb
the higher fixed overhead costs associated with the Company's new facility and
equipment; and (2) improving production efficiencies through expanded training
and the implementation of additional controls.
The Company has focused considerable attention toward building
long-term relationships in the area of contract design and manufacturing. These
efforts were rewarded during March 1996, when the Company was awarded a $1
million manufacturing contract from Select Comfort, Inc., one of America's
fastest-growing companies. Management believes that this contract, which will
satisfy Select Comfort's 1996 production requirements, is the first step in what
can be a mutually satisfying, long-term relationship. Management believes that
its efforts will begin to show an improvement in gross profit performance in
1996.
Operating Expenses. General and administrative expense increased from
$591,433 or 11.0% of sales for the year ended December 31, 1994 to $726,333 or
12.4% of sales for the year ended December 31, 1995. The increase in general and
administrative expense during 1995 was primarily due to increased expenses and
associated with operating a larger facility.
6
<PAGE>
Marketing expense was $202,528 or 3.5% of sales for the year ended
December 31, 1995 compared to $188,476, or 3.5% of sales in 1994. The increase
in marketing expense during 1995 was primarily due to increased advertising
expense, increased trade show attendance, and additional marketing activities
specifically related to expanding the Company's customer base for its contract
design and manufacturing services.
Research and development expense was $209,918, or 3.6% of sales during
the year ended December 31, 1995 compared to $174,676, or 3.2% of sales during
1994. The increase in research and development expense was primarily due to the
addition of staff and equipment required for new product development and the
enhancement of existing products, as well as to support increasing demand for
engineering services by customers for whom the Company provides contract design
and manufacturing services.
Interest Expense. Total interest expense, including interest related to
the building and equipment lease obligations was $248,212 for the year ended
December 31, 1995, compared to $74,179 in 1994. The increase in interest expense
was primarily due to the new facility and capital equipment leases.
Net Loss. As a result of the factors discussed above, the Company
recorded a net loss of $149,907, or $0.06 per share, for the year ended December
31, 1995, as compared to net income of $481,527, or $0.22 per share, during
1994.
The Company believes inflation has not significantly affected its
results of operations.
Results of Operations - 1994 vs. 1993
Sales. The Company recorded sales of $5,398,308 for the year ended
December 31, 1994, compared to $3,973,061 for 1993. Sales increased $1,425,247
or 35.9% in 1994 over 1993. While the increase in sales is largely due to
increased sales from the contract design and manufacturing sector of the
Company's business, sales from the Company's security/industrial proprietary
products also increased by approximately 27.3% over 1993.
Gross Profit. Gross profit, as a percentage of sales, was 28% for the
year ended December 31, 1994, unchanged from the same period in 1993. Due to the
stability of the sales mix of contract design and manufacturing and
security/industrial product sales, the gross profit margins remained consistent
for 1994 and 1993. The Company is currently implementing more automated
processes and has acquired additional capital equipment under a capital lease
agreement. While the acquisition of additional capital equipment under these
equipment lease agreements will increase fixed costs, the Company believes that
the greater production capacity and the potentially improved efficiency that is
available from the acquisition of such capital equipment may tend to offset
these higher fixed costs in the future.
Operating Expenses. General and administrative expense increased to
$591,433 in 1994 from $462,273 in 1993. As a percentage of sales, however,
general and administrative expense declined to 11% for the year ended December
31, 1994 from 12% during 1993. The relatively consistent percentage of general
and administrative expense to sales is largely due to increased sales.
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<PAGE>
Marketing expense, as a percentage of sales, was 3% for the year ended
December 31, 1994 compared to 4% during 1993. The Company has continued to
emphasize the marketing of its security/industrial products, while also actively
pursuing additional long-term contract design and manufacturing customer
relationships. Actual marketing expenses increased $17,160 during 1994, compared
to 1993.
Research and development expense increased by $35,440 in 1994 compared
to 1993. Research and development expense, as a percentage of sales, was 3% for
the year ended December 31, 1994, compared to 4% during 1993. The Company has
continued to invest more resources toward the development of new products, as
well as to enhance existing products. The Company also continues to provide full
technical services to its customers.
Net Income. The Company recorded net income of $481,527, or $0.24 per
share, based on the weighted average number of shares outstanding for the year
ended December 31, 1994, compared to net income of $319,279, or $0.16 per share,
for the same period in 1993. The increase in net income during 1994 is primarily
the result of increased sales in contract design and manufacturing and, to a
lesser degree, increased sales in security/industrial products.
Interest Expense. Interest expense increased from 1% of sales in 1993
to 1.4% of sales in 1994. The increase in interest expense is primarily due to
the addition of $400,000 of capital equipment under a capital lease agreement,
increased short-term working capital requirements to support expanding sales in
1994 and higher interest rates during 1994.
Liquidity and Capital Resources
At December 31, 1995, the current ratio was 1.61 to 1, compared to 1.62
to 1 on December 31, 1994. Working capital was $1,221,862 on December 31, 1995
compared to $913,693 on December 31, 1994. The increase in working capital
primarily reflects increases in accounts receivable and inventory, offset in
part by an increase in accounts payable. In addition, in connection with the
Company's March 1995 sale of its common stock in a private placement, and the
exercise of warrants to purchase common stock, the Company was provided with
$887,000 in cash.
During 1995, the Company had a revolving credit agreement with First
Bank N.A. of Mankato, with a maximum loan limit of $1,500,000, subject to
additional limitations as set forth in the credit agreement. The interest rate
was calculated at .75% over the prime interest rate. At December 31, 1995, there
was a balance of $1,075,452 outstanding under the line of credit.
In February 1996, the Company executed a credit agreement with Norwest
Bank Minnesota South N.A. which provided a new revolving line of credit from
Norwest Bank to replace its existing line of credit with First Bank. The new
revolving credit agreement, which provides a maximum loan limit of $2,000,000
and an interest rate calculated at .75% over the prime rate, also permits a more
favorable method of calculating the borrowing limits of the Company's inventory.
The revolving credit line is subject to further limitations as set forth in the
revolving credit agreement. In connection with its new lending agreement with
Norwest Bank, the Company has moved substantially all of its banking activities
to Norwest Bank.
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<PAGE>
Construction of the Company's new 55,000 square foot facility was
completed in February 1995, and subsequently, the Company relocated its
operations. Funds for the construction of the facility, the site, and site
improvements were acquired through a $1,700,000 building loan from the city of
Mankato, a $500,000 state small cities loan arranged through the city of
Mankato, and $270,000 in tax increment financing from the city of Mankato.
Combined the two loans are payable in equal monthly installments of $16,200
until January 1, 2000, at which time, the Company may be required to renew the
financing on the building.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are at the pages set forth below:
Page
Independent Auditors' Report dated February 8, 1996........................ 10
Balance Sheet as of December 31, 1995 and 1994 ............................ 11
Statement of Operations for Years Ended
December 31, 1995 and 1994................................................. 12
Statement of Changes in Stockholders' Equity for
Years Ended December 31, 1995 and 1994..................................... 13
Statement of Cash Flows for Years Ended
December 31, 1995 and 1994................................................. 14
Notes to Financial Statements.............................................. 15
9
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AHERN MONTAG & VOGLER, LTD.
Certified Public Accountants
227 East Main Street, Suite 110
P.O. Box 3745
Mankato, Minnesota 56002-3745
Telephone: (507) 625-8490 Fax: (507) 625-5391
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Winland Electronics, Inc.
Mankato, Minnesota 56001
We have audited the accompanying balance sheets of Winland Electronics, Inc. as
of December 31, 1995 and 1994, and the related statements of operations, changes
in stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Winland Electronics, Inc. as of
December 31, 1995 and 1994 and the results of its operations and cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ Ahern Montag & Vogler, Ltd.
AHERN MONTAG & VOGLER, LTD.
Certified Public Accountants
February 8, 1996
10
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WINLAND ELECTRONICS, INC.
BALANCE SHEET
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
------ ------ ------
<S> <C> <C>
Current
Cash $ 2,839 $ 17,797
Accounts Receivable, Net 995,231 649,960
Inventory 2,195,042 1,688,852
Prepaid Expenses 40,924 27,389
----------- -----------
Total Current Assets 3,234,036 2,383,998
----------- -----------
PROPERTY AND EQUIPMENT at Cost, Less
Accumulated Depreciation 2,884,759 180,830
----------- -----------
PROPERTY UNDER CAPITAL LEASES, Less
Accumulated Amortization 426,857 377,776
----------- -----------
PATENTS AND TRADEMARKS at Cost, Less
Accumulated Amortization 10,093 11,622
----------- -----------
TOTAL ASSETS $ 6,555,745 $ 2,954,226
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Current
Notes Payable $ 1,075,452 $ 908,452
Accounts Payable 630,460 338,513
Wages Payable 25,622 19,094
Payroll Taxes Payable 11,770 12,198
Other Accruals 73,126 109,755
Income Taxes Payable -- 3,462
Deferred Revenue 27,001 --
Obligations Under Capital Leases 108,081 78,831
Current Maturities 60,662 --
----------- -----------
Total Current Liabilities 2,012,174 1,470,305
----------- -----------
Long-Term
Deferred Revenue, Less Current Portion 243,008 --
Obligations Under Capital Leases, Less
Current Obligations 300,373 307,576
Long-Term Debt, Less Current Maturities 2,086,499 --
----------- -----------
Total Long-Term Liabilities 2,629,880 307,576
----------- -----------
Total Liabilities 4,642,054 1,777,881
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock, Par Value $.01 per share,
20,000,000 shares authorized, 2,583,311
and 2,010,311 shares issued and out-
standing at December 31, 1995 and 1994,
respectively 25,833 20,103
Additional Paid-in Capital 1,917,094 1,035,571
(Deficit) Retained Earnings (29,236) 120,671
----------- -----------
Total Stockholders' Equity 1,913,691 1,176,345
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 6,555,745 $ 2,954,226
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
11
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----- ------
<S> <C> <C>
SALES $ 5,850,724 $ 5,398,308
COST OF SALES (4,791,200) (3,882,339)
----------- -----------
GROSS PROFIT 1,059,524 1,515,969
----------- -----------
OPERATING EXPENSES
General and Administrative 726,333 591,433
Marketing 202,528 188,476
Research and Development 209,918 174,676
----------- -----------
Total Operating Expenses 1,138,779 954,585
----------- -----------
OPERATING (LOSS) INCOME (79,255) 561,384
----------- -----------
OTHER INCOME AND (EXPENSES)
Miscellaneous Income 10,300 --
Interest Expense (79,591) (74,179)
Sale of Assets (1,361) --
----------- -----------
Total Other Income and (Expenses) (70,652) (74,179)
----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES (149,907) 487,205
INCOME TAXES -- (5,678)
----------- -----------
NET (LOSS) INCOME ($ 149,907) $ 481,527
=========== ===========
EARNINGS PER SHARE DATA
- -----------
Earnings Per Common and
Dilutive Common Equivalent Share ($ 0.06) $ 0.22
=========== ===========
Weighted Average Number of
Common and Dilutive Common
Equivalent Shares 2,487,061 2,238,866
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
12
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT)
-------- -------- --------
<S> <C> <C> <C>
BALANCES ON 1-1-94 $ 20,028 $1,035,196 ($ 360,856)
Sale of Common Stock
Issued Under Stock Option
for $.06 Per Share 75 375
Net Income -- -- 481,527
---------- ---------- --------
BALANCES ON 12-31-94 20,103 1,035,571 120,671
Sale of Common Stock
Issued Under Stock Option,
3,000 Shares at $.06 Per Share 30 150 --
Sale of Common Stock
Issued Under Private Placement,
370,000 Shares at $2.00 Per Share 3,700 633,373 --
Sale of Common Stock
Issued Under Warrants, 200,000
Shares at Average of $1.25 Per Share 2,000 248,000 --
Net (Loss) -- -- (149,907)
---------- ---------- ----------
BALANCES ON 12-31-95 $ 25,833 $1,917,094 ($ 29,236)
========== ========== ==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
13
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash Received from Customers $ 5,491,253 $ 5,351,517
Other Miscellaneous Operating Receipts 10,300 --
Cash Paid to Suppliers and Employees (5,820,030) (5,603,700)
Interest Paid (238,793) (70,181)
Income Taxes Paid (4,394) (4,059)
----------- -----------
Net Cash (Used) by Operating Activities (561,664) (326,423)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases Of Property and Equipment (2,576,654) (150,426)
Equipment Sale Proceeds 2,819 --
----------- -----------
Net Cash (Used) by Investing Activities (2,573,835) (150,426)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Advances on Credit Line 167,000 483,905
Proceeds from Debt 2,199,620 --
Payments on Debt (52,459) --
Payments on Capital Lease Obligations (80,873) --
Sale of Common Stock 887,253 450
----------- -----------
Net Cash Provided by Financing Activities 3,120,541 484,355
----------- -----------
NET (DECREASE) INCREASE IN CASH (14,958) 7,506
CASH - BEGINNING OF YEAR 17,797 10,291
----------- -----------
CASH - END OF YEAR $ 2,839 $ 17,797
=========== ===========
RECONCILIATION OF NET (LOSS) INCOME TO NET CASH (USED)
BY OPERATING ACTIVITIES
-----------
Net (Loss) Income ($ 149,907) $ 481,527
Adjustment to Reconcile Net (Loss) Income
to Net Cash From Operating Activities
Depreciation & Amortization 193,922 54,732
Loss on Sale of Assets 1,361 --
Changes in Assets & Liabilities
(Increase) in Accounts Receivable (345,271) (46,791)
(Increase) in Inventory (506,190) (1,147,604)
(Increase) Decrease in Prepaid Expenses (13,535) 738
Increase in Accounts Payable 291,947 216,250
Increase in Wages Payable 6,528 334
(Decrease) Increase in Payroll Taxes Payable (428) 6,018
(Decrease) Increase in Other Accruals (36,629) 105,754
(Decrease) Increase in Income Taxes Payable (3,462) 2,619
----------- -----------
Net Cash (Used) by Operating Activities ($ 561,664) ($ 326,423)
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
14
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
Operating Characteristics - The Corporation was formed October 30, 1972,
and was originally named Crown-Toupe North Central, Inc. Development stage
activities were conducted in the electronics field. On August 26, 1975,
the name was changed to Winland, Inc. Subsequent to December 31, 1983, the
name was changed to Winland Electronics, Inc. The Company is engaged in
the construction and assembly of electronic devices and extends unsecured
credit to its customers in this industry.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses during the reported
period.
Accounts Receivable/Uncollectibles - The Company maintains an allowance
for doubtful accounts based on the aging of accounts receivable. The
balance of the allowance for doubtful accounts at December 31, 1995 and
1994 is $5,000 and $2,255, respectively.
Inventories - Inventories are stated at the lower of cost or market. Cost
of raw materials and purchased parts or subassemblies is determined
principally by the first-in, first-out method. Cost of finished goods is
determined principally by the standard cost method, which approximates
average costs.
Property and Depreciation - Property and equipment are carried at cost.
Maintenance and repairs are charged to operations and improvements are
capitalized. Items sold, retired, or otherwise disposed of are removed
from the asset and accumulated depreciation accounts and any gains or
losses thereon are reflected in operations.
Depreciation is computed using the straight-line method at rates based on
the estimated service lives of the various assets as follows:
Building 39 Years
Land Improvements 20 Years
Office Equipment 7 Years
Factory Equipment 7 Years
Research & Development Equipment 7 Years
Display Equipment 7 Years
Property Under Capital Leases 4 - 7 Years
Intangibles - Costs of Patents and Trademarks are capitalized and
amortized over the estimated useful life of the related products,
approximately 20 years.
Income Taxes - Investment tax credits are accounted for by the
flow-through method of accounting.
15
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Earnings Per Share - Earnings per common and dilutive common equivalent
share is based upon the weighted average of common and dilutive common
equivalent shares outstanding during the year under the treasury stock
method. All stock options and warrants are considered to be common stock
equivalents. However, the earnings per share calculation for the year
ended December 31, 1995 does not consider stock options and warrants
because their inclusion would be anti-dilutive. Primary and fully diluted
earnings per share are the same.
2. INVENTORIES
Inventories are Comprised of:
1995 1994
Raw Materials $1,458,611 $867,911
Work in Progress 405,102 501,099
Finished Goods 322,231 313,124
Supplies 9,098 6,718
---------- ----------
Total $2,195,042 $1,688,852
========== ==========
3. PROPERTY AND EQUIPMENT
Property and Equipment consists of:
1995 1994
Land $ 192,640 $ --
Land Improvements 77,369 --
Building 2,268,510 22,575
Office Equipment 241,431 138,940
Factory Equipment 410,570 234,734
Research & Development Equipment 64,829 37,987
Display Equipment 14,999 11,179
Leasehold Improvements -- 65,169
--------- --------
Total $3,270,348 $510,584
Accumulated Depreciation (385,589) (329,754)
--------- --------
Total Property and Equipment,
Net of Depreciation and
Amortization $2,884,759 $180,830
========== ========
Depreciation and amortization charged to expense for the years ended
December 31, 1995 and 1994 was $192,393 and $53,202, respectively. These
amounts include amortization of property under capital lease assets.
16
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
4. LEASES
Leased Property under capital leases consists of the following:
1995 1994
---- ----
Factory Equipment $447,311 $362,171
Office Equipment 95,754 50,750
Research & Development Equipment 4,401 4,401
-------- --------
Total $547,466 $417,322
Accumulated Amortization (120,609) (39,546)
-------- --------
Total Leased Property Under
Capital Leases, Net of Accumulated
Amortization $426,857 $377,776
======== ========
Capital lease obligations are summarized as follows:
1995 1994
---- ----
Lease on factory, office and R & D
equipment with lease period expiring
July, 1997, at interest of 8%. $ 21,185 $ 35,025
Lease on factory and office equipment
with lease period expiring January,
2000 at interest of 1% over prime,
10.2% at December 31, 1995. 325,050 351,382
Lease on factory equipment with
lease period expiring October, 1998
at interest of 9.23%. 38,544 --
Lease on office equipment with
lease period expiring March, 2000
at interest of 9%. 23,675 --
-------- --------
Total $408,454 $386,407
Less: Current Portion (108,081) (78,831)
-------- --------
Obligation under capital leases,
less current portion $300,373 $307,576
======== ========
The Company leases computer equipment and vehicles under noncancellable
operating leases that expire from 1996 to 1998. The lessee is
responsible for all repairs and maintenance, insurance, and other
related expenses in connection with these leases.
Rental and other related expenses for the above leases for the years
ended December 31, 1995 and 1994 was $95,470 and $109,290, respectively.
17
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
4. LEASES - (Continued)
Minimum future annual lease payments under these leases as of December
31, 1995 are as follows:
Years Ended Capital Operating
December 31, Leases Leases
------------ ------- --------
1996 $144,581 $ 36,888
1997 135,165 27,317
1998 108,755 2,568
1999 93,937 --
2000 8,369 --
-------- -------
Total Minimum Lease Payments $490,807 $ 66,773
======== ========
Less Amounts
Representing Interest (82,353)
Present Value of Net --------
Minimum Lease Payments $408,454
========
5. INTANGIBLES
Costs related to patents and trademarks that pertain to the Company's
products have been capitalized to Patents and Trademarks.
Intangibles consist of:
1995 1994
Patents and Trademarks $ 34,240 $ 34,240
Accumulated Amortization (24,147) (22,618)
-------- -------
Total Intangibles, Net of Amortization $ 10,093 $ 11,622
======== ========
Amortization charged to expense for the years ended December 31, 1995
and 1994 was $1,529 and 1,530, respectively.
6. LINE OF CREDIT
As of June 30, 1994, the Company has a working capital line of credit
in the maximum amount of $1,500,000. Interest is calculated at .75%
over prime and is due monthly. Principal is due May 31. The line is
secured by inventory, equipment and accounts receivable and is subject
to a defined borrowing base equal to 80% of qualified accounts
receivable and 50% of inventories. In addition, other conditions
including ratios and net income levels must be met. As of January 31,
1996 the maximum credit available was increased to $2,000,000 and the
defined borrowing base for inventories was increased to 60%. Pertinent
credit line information is as follows:
1995 1994
---- ----
Year End Balance $1,075,452 $908,452
Stated Interest Rate 9.25% 9.75%
Weighted Average Interest Rate 9.59% 9.72%
Maximum Amount Outstanding $1,373,452 $988,452
Average Amount Outstanding $853,529 $686,499
Unused Credit Available $126,548 $439,898
18
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
7. LONG-TERM DEBT
The following is a summary of long-term debt:
1995 1994
---- ----
Note payable in monthly installments
of $13,117 including interest at
6.941% to January 1, 2000 when the
remaining balance is payable. Secured
by land, building and equipment. $1,662,409 $ 0
Note payable in monthly installment of
$3,030 including interest at 4%
to January 1, 2000, when the remaining
balance is payable. Secured by land,
building and equipment. 484,752 0
---------- ---------
Total $2,147,161 $ 0
Amount due in one year or less (60,662) 0
---------- ---------
Total Long-Term Debt $2,086,499 $ 0
========== =========
Maturities of long-term debt are as follows:
1996 $60,662
1997 64,475
1998 68,539
1999 72,872
2000 1,880,613
----------
Total $2,147,161
==========
Interest expense for the years ended December 31, 1995 and 1994 was
$248,212 and $74,179, respectively, and interest paid in cash for the
years ended December 31, 1995 and 1994 was $238,793 and $70,181,
respectively. These amounts include interest paid on capital lease
obligations.
8. CUSTOMER DEPENDENCE
The Company is dependent on certain customers for a significant portion
of its total sales. Total sales to customers whose individual sales
equaled or exceeded 10% of the Company's total sales for the years
ended December 31, 1995 and 1994 was $3,856,354 and $3,922,921,
respectively.
19
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
9. INCOME TAXES
Deferred Tax Assets
The following future benefits are recognized by the Company as deferred
tax assets:
1995 1994
---- ----
Unused NOL Carryover $200,028 $156,288
Unused R & D Credit 17,766 7,177
Unused ITC Credit 12,791 12,791
Unused Jobs Credit 14,540 14,540
Unused AMT Credit 7,756 7,756
Inventory 47,785 31,481
--------- --------
Total $300,666 $230,033
Valuation Allowance (300,666) (230,033)
--------- --------
Total Deferred Tax Assets $ -0- $ -0-
========= ========
Components of the provision for income taxes are as follows:
1995 1994
---- ----
Current Taxes Payable $ $230,546
Tax benefit of NOL C/O (223,663)
Tax benefit of R & D Credit (1,205)
-------- -------
Provision for Income Taxes $ $ 5,678
======== =======
Statutory income tax rate reconciliation to effective rate:
1995 1994
---- ----
Statutory U.S. Income Tax Rate 39.0% 39.0%
State Taxes, Net of Federal Tax Benefit 5.98%
Operating Losses, no Current Tax Benefit (39.0%)
Tax Benefit of NOL C/O (40.47%)
Graduated Rates Difference (3.34%)
Effective Income Tax Rate 0% 1.17%
The Company has the following tax carryforward items.
Investment Tax Credits of $12,791 which were reduced 35% by the Tax
Reform Act of 1986 expire on 12-31-2000. Credits for increasing
research and development activities of $17,766 will expire on December
31, 2008 through 2010. Credits for alternative minimum tax of $7,756
and a $14,540 targeted jobs credit are available for future use. Net
operating losses expire as follows:
December 31 Federal Loss Expires State Loss Expires
----------- ------- ------------ ----- ------------
1989 ($271,245) 12-31-2004 $ -0- 12-31-2004
1991 (193,266) 12-31-2006 (173,673) 12-31-2006
1995 (109,148) 12-31-2010 (105,626) 12-31-2010
---------- ----------
($573,659) ($279,299)
========== ==========
20
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
10. COMMON STOCK OPTION PLAN AND WARRANTS
On May 23, 1989, the Winland Board of Directors adopted the Winland
Electronics, Inc. 1989 Stock Option Plan and reserved 100,000 shares of
Winland common stock for issuance upon exercise of options to be
granted under the plan. During 1992 the 1989 Plan was amended to
reserve 300,000 shares under the plan. During 1994 the 1989 plan was
again amended to grant non-employee directors an option to purchase
2,000 shares of common stock at a price equal to 100% of the fair
market value on the date the director is elected. Subsequent to the
initial 2,000 share option, each non-employee director will receive an
additional option to purchase 2,000 shares of common stock at 100% of
the fair market value each time they are re-elected, but not more than
one option to purchase 2,000 share in any fiscal year. Also, the number
of shares reserved under the Plan was increased from 300,000 to 450,000
in 1994. The Company has also granted common stock options outside of
the 1989 common stock option plan.
The transactions for shares under option were:
1995 1994
---- ----
Outstanding, Beginning of Year
Shares 342,700 319,200
Price .06 to 2.50 .06 to 1.00
Granted
Shares 82,000 71,000
Price 2.69 to 3.64 1.8125 to 2.50
Exercised
Shares 3,000 7,500
Price .06 .06
Cancelled
Shares -0- 40,000
Price N/A .16 to 1.12
Outstanding, End of Year
Shares 421,700 342,700
Price .06 to 3.64 .06 to 2.50
As of December 31, 1995, of the total number of options outstanding,
252,900 were exercisable.
The Company has also issued 37,000 common stock warrants at $2.20 per
share. At December 31, 1995 all of the warrants were exercisable.
21
<PAGE>
WINLAND ELECTRONICS, INC.
Notes to Financial Statements
11. PENSION PLAN
The Company has adopted a qualified defined contribution 401K profit
sharing plan for its employees who meet certain age and service
requirements. Employees are allowed to contribute up to 15% of eligible
compensation and the employer, at management's discretion, makes a
contribution of one third of the employees' contributions up to a
maximum of 8% for the employees, a maximum of 2.67% for the employer.
The Company contributed $27,003 and $20,366 to the Plan for the years
ended December 31, 1995 and 1994, respectively.
12. TAX INCREMENT FINANCING
The Company and the City of Mankato have entered into a tax increment
financing agreement. Per the agreement, the City has financed the
construction of the Company's new building. In addition, the City has
donated land and land improvements at a fair market value of $270,009
to the Company. The Company will recognize the $270,009 of deferred
revenue over the 10 year life of the tax increment finance district.
13. NON-CASH TRANSACTIONS
During the years ended December 31, 1995 and 1994, the Company acquired
$130,144 and $351,382, respectively, of property under capital leases
and incurred obligations under capital leases of $130,144 and $351,382,
respectively, in non-cash investing and financing activities. In
addition, during the year ended December 31, 1995, the Company attained
$270,009 of land and land improvements and recorded $270,009 of
deferred revenue in non-cash activities.
14. FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments approximate
fair value.
22
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
The information required by Item 9 concerning the directors and
executive officers of the Company is incorporated by reference to the Company's
definitive proxy statement for its 1996 Annual Meeting of Shareholders under the
captions "Election of Directors" and "Executive Officers of the Company."
The information required by Item 9 concerning compliance with Section
16(a) of the Exchange Act is incorporated by reference to the Company's
definitive proxy statement for its 1996 Annual Meeting of Shareholders under the
caption "Compliance with Section 16(a) of the Exchange Act."
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated by reference to the
Company's definitive proxy statement for its 1996 Annual Meeting of Shareholders
under the caption "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 11 is incorporated by reference to the
Company's definitive proxy statement for its 1996 Annual Meeting of Shareholders
under the caption "Principal Shareholders and Management Shareholdings."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated by reference to the
Company's definitive proxy statement for its 1996 Annual Meeting of Shareholders
under the caption "Certain Transactions."
23
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following Exhibits are included in this report: See
"Exhibit Index" immediately following the signature page of this Form 10-KSB.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1995.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
WINLAND ELECTRONICS, INC.
("Company")
Dated: March 26, 1996 /s/ W. Kirk Hankins
W. Kirk Hankins, President, Chief
Executive Officer and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Company,
in the capacities, and on the dates, indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints W.
Kirk Hankins and Lorin E. Krueger as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report on Form 10-KSB and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
25
<PAGE>
Signature and Title Date
/s/ W. Kirk Hankins March 26, 1996
- ----------------------------------------------
W. Kirk Hankins, President, Chief Executive
Officer, Chief Financial Officer and Director
(Principal Executive Officer and Principal
Financial and Accounting Officer)
/s/ Lorin E. Krueger March 26, 1996
- -----------------------------------------------
Lorin E. Krueger, Senior Vice President of
Operations and Director
/s/ Swen E. Farland March 26, 1996
- -----------------------------------------------
Swen E. Farland, Director
/s/ S. Robert Dessalet March 26, 1996
- -----------------------------------------------
S. Robert Dessalet, Director
/s/ Kirk P. Hankins March 26, 1996
- -----------------------------------------------
Kirk P. Hankins, Vice President of Marketing
and Director
/s/ Thomas J. de Petra March 26, 1996
- -----------------------------------------------
Thomas J. de Petra, Director
26
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-KSB
For the fiscal year ended Commission File No. 0-15471
December 31, 1995
--------------------------
WINLAND ELECTRONICS, INC.
--------------------------
Exhibit
Number Item
3.1 Restated Articles of Incorporation, as amended
(Incorporated by reference to Exhibit 3.1 to Form
10-KSB for the fiscal year ended December 31, 1994)
3.2 Restated Bylaws (Incorporated by reference to Exhibit
3.2 to Registration Statement on Form S-4, SEC File
No. 33-31246)
4.1 Specimen of Common Stock certificate (Incorporated
by reference to Exhibit 4 to Registration Statement on
Form S-4, SEC File No. 33-31246)
10.1 Winland Electronics, Inc. 1989 Stock Option Plan
(Incorporated by reference to Exhibit 10.6 to
Registration Statement on Form S-4, SEC File No.
33-31246)**
10.2 Amendment to Winland Electronics, Inc. 1989 Stock
Option Plan (Incorporated by reference to Exhibit 10.4
to Form 10-KSB for the fiscal year ended December
31, 1993)**
10.3 Form of Incentive Stock Option Agreement for use
under the 1989 Stock Option Plan (Incorporated by
reference to Exhibit 10.7 to Registration Statement on
Form S-4, SEC File No. 33-31246)**
10.4 Amendment to Winland Electronics, Inc. 1989 Stock
Option Plan dated December 22, 1994 (Incorporated by
reference to Exhibit 10.4 to Form 10-KSB for the fiscal
year ended December 31, 1994)**
27
<PAGE>
10.5 Form of Nonqualified Stock Option Agreement for use
under the 1989 Stock Option Plan (Incorporated by
reference to Exhibit 10.8 to Registration Statement on
Form S-4, SEC File No. 33-31246)**
10.6 Description of Executive Bonus Plan (Incorporated by
reference to Exhibit 10.6 to Form 10-KSB for the fiscal
year ended December 31, 1992)**
10.7 Loan Agreement and Security Agreement dated June 3,
1994 between the Company and First Bank N.A., and
Promissory Note in favor of First Bank N.A. dated
June 3, 1994 (Incorporated by reference to Exhibit 10.8
to Form 10-KSB for the fiscal year ended December
31, 1994)
10.8 Construction Loan Agreement dated October 5, 1994
between the Company and The City of Mankato,
Minnesota (Incorporated by reference to Exhibit 10.9 to
Form 10-KSB for the fiscal year ended December 31,
1994)
10.9 $1,935,000 Combination Mortgage, Security
Agreement and Fixture Financing Statement dated
August 3, 1994 by the Company to The City of Mankato,
Minnesota (Incorporated by reference to Exhibit 10.10 to
Form 10-KSB for the fiscal year ended December 31, 1994)
10.10 Promissory Note of the Company in the principal
amount of $1,699,620 dated October 6, 1994 in favor
of The City of Mankato, Minnesota (Incorporated by
reference to Exhibit 10.11 to Form 10-KSB for the fiscal
year ended December 31, 1994)
10.11 Development Agreement dated July 29, 1994 between
the Company and The City of Mankato, Minnesota
(Incorporated by reference to Exhibit 10.12 to Form 10-KSB
for the fiscal year ended December 31, 1994)
10.12 Agreement for Loan of Small Cities Development
Program Funds dated October 6, 1994 between the
Company and The City of Mankato, Minnesota (Incorporated
by reference to Exhibit 10.13 to Form 10-KSB for the
fiscal year ended December 31, 1994)
28
<PAGE>
10.13 Promissory Note of the Company in the principal
amount of $500,000 dated October 6, 1994 in favor of
The City of Mankato, Minnesota (Incorporated by reference
to Exhibit 10.14 to Form 10-KSB for the fiscal year ended
December 31, 1994)
10.14 Supplemental Bonus Plan for W. Kirk Hankins and
Lorin Krueger adopted May 22, 1995**
10.15 Employment Agreement dated May 15, 1995 between
the Company and W. Kirk Hankins**
10.16 Employment Agreement dated May 15, 1995 between
the Company and Lorin E. Krueger**
10.17 Employment Agreement dated July 15, 1995 between
the Company and Kirk P. Hankins**
10.18 Credit Agreement dated January 31, 1996 between the
Company and Norwest Bank Minnesota South, National
Association
10.19 Revolving Note of the Company dated January 31,
1996 in the principal amount of $2,000,000 in favor of
Norwest Bank Minnesota South, National Association
10.20 Security Agreement dated January 31, 1996 between
the Company and Norwest Bank Minnesota South,
National Association
23.1 Consent of Ahern Montag & Vogler, Ltd.
24.1 Power of Attorney for W. Kirk Hankins, Lorin E.
Krueger, Swen E. Farland, S. Robert Dessalet, Kirk P.
Hankins and Thomas J. de Petra (included on signature
page of this Form 10-KSB)
27 Financial Data Schedule
* Incorporated by reference.
** Management agreement or compensatory plan or arrangement.
29
SUPPLEMENTAL BONUS PLAN
FOR W. KIRK HANKINS AND LORIN KRUEGER
1. The amount of shareholder value will be calculated from a baseline of the
December 31, 1994 bid price of the stock, times the number of shares
outstanding.
2. The growth in shareholder value will be the difference between (a) the
current year bid price at the end of the year, times the number of shares
outstanding at the end of the year equals current year shareholder value, (see
footnote at bottom of page) and (b) the current year shareholder value divided
by the baseline shareholder value will determine the percentage increase of
shareholder value.
3. The percentage of growth will be multiplied by the current year's base pay as
step one.
4. Because it would be detrimental to the company and the price of the stock to
pay a large bonus with a small profit, we wish to establish a framework for
payment of this bonus based on after tax and after bonus profit. The following
schedule will be used to determine actual payment. Step two - The percentage
increase in shareholder value from Item 2 will be multiplied by the percentage
in this schedule. For example ... If the percent of stockholder value increase
was 50% and the Company profit was $250,000, twenty percent would be multiplied
by 50% for a net allowance of 10% of base pay payable at the end of the year. If
the total amount of bonus calculated exceeded $50,000 it would drop the
after-tax and bonus to below $200,000 and the percent would drop to 10% times
the 50% or 5%. If this calculation brought it below $100,000, there would be no
bonus paid.
Dollars (000's)
After tax and Percent of After tax and Percent of
bonus profit shareholder value bonus profit shareholder value
increase increase
000 - 099 0 500 - 599 50%
100 - 199 10% 600 - 699 60%
200 - 299 20% 700 - 799 70%
300 - 399 30% 800 - 899 80%
400 - 499 40% 900 - 999 90%
1000 - up 100%
5. An additional limit will be set that regardless of profit or increase in
shareholder value the annual payment can never exceed 100% of the individuals
base pay.
6. If the shareholder value drops below the baseline period, there will be no
bonus until shareholder value again exceeds the baseline.
<PAGE>
7. Step three - Payments received starting with 1995 will be subtracted from
subsequent year payments.
8. It is the intent that there will never be a duplicate payment in this plan.
For example ... If a payment is made at the end of 1995 and in 1996 shareholder
value drops below the baseline, there would be no payment until the shareholder
value again exceeded the baseline. Step three - All prior year payments would be
subtracted from the calculated amount payable in step two to determine the
amount to be paid in a given year. The amount to be paid in a given year cannot
exceed the base pay; however, when the calculation is made in step two and prior
year payments are subtracted, it is at this point that the limit of base pay
will be applied.
This bonus plan will expire December 31, 1999 unless otherwise acted upon by all
parties.
If death should occur to one of the parties involved, the bonus plan will be
paid up until the time of death.
Footnote: December 31, 1994 - Closing bid price - 2 1/8
- Number of shares outstanding - 2,010,311
- Shareholder value - $4,271,911
A motion was made at the Board of Directors Meeting on May 22, 1995 by Bob
Dessalet, and seconded by Tom dePetra to accept the Supplemental Bonus Plan. The
motion carried unanimously.
APPROVED BY:
/s/ Bob Dessalet /s/ Tom de Petra
Bob Dessalet Tom dePetra
/s/ Swen Farland
Swen Farland
EMPLOYMENT AGREEMENT
This Agreement is made effective as of this 15th day of May, 1995 between
Winland Electronics, Inc., a Minnesota corporation (the "Corporation"), and W.
Kirk Hankins ("Employee").
R E C I T A L S:
A. Employee is presently employed by the Corporation as President, Chief
Executive Officer and Chief Financial Officer of the Corporation.
B. The Corporation believes Employee is valuable to the future growth of
the Corporation and its business.
C. Employee and the Corporation desire to enter into an agreement to set
forth the relationship between the parties.
D. The Corporation has agreed to grant to Employee a stock option for the
purchase of 10,000 shares of the Corporation's Common Stock as consideration for
entering into this Agreement and in particular the noncompetition provisions of
Article 5.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE 1
EMPLOYMENT; TERM OF EMPLOYMENT
1.1) Employment. The Corporation hereby employs Employee and Employee
hereby accepts employment upon the terms and conditions hereinafter set forth.
1.2) Term. The term (the "Initial Term") of Employee's employment under
this Agreement shall commence on May 15, 1995, and continue thereafter until
December 31, 1997, unless sooner terminated in accordance with the provisions of
this Agreement. Either party may terminate this Agreement at the end of the
Initial Term (or any Additional Term) by giving to the other party sixty (60)
days written notice (the "Nonrenewal Notice"). If the Nonrenewal Notice is not
given, the Term shall be extended for an additional period of one (l) year (an
"Additional Term"), upon the terms and conditions provided herein. "Term" shall
mean the Initial Term and any Additional Terms.
<PAGE>
ARTICLE 2
DUTIES; EXTENT OF SERVICES
2.1) Duties. During the Initial Term, Employee shall be employed as
President, Chief Executive Officer and Chief Financial Officer of the
Corporation and/or such other positions to which the Board of Directors of the
Corporation may appoint Employee. During the Additional Terms, Employee agrees
to be employed in such position(s) determined by mutual agreement between
Employee and the Board of Directors of the Corporation for each Additional Term.
Employee shall have such responsibilities as the Bylaws of the Corporation may
assign to the person serving in such position subject to the authority of the
Board of Directors of the Corporation or such other person(s) as such Boards of
Directors may designate from time to time. Employee further agrees to abide by
reasonable rules, regulations, policies and programs established by the Board of
Directors of the Corporation in performance of his duties.
2.2) Extent of Service. Employee shall devote his full time and attention
and energies to the business of the Corporation and its subsidiaries, perform
such services as shall be from time to time designated by the Board of Directors
and use his best efforts to promote the interests of the Corporation and its
subsidiaries.
ARTICLE 3
COMPENSATION
3.1) Base Salary. For each fiscal year of the Corporation during the
Initial Term, the Corporation shall pay Employee an annual base salary ("Base
Salary") in the amount set forth below opposite the applicable fiscal year or
such greater amount as may be determined by the Compensation Committee of the
Corporation's Board of Directors:
Fiscal Year Base Salary
May 15, 1995 - December 31, 1995 $ 65,625
January 1, 1996 - December 31, 1996 $113,400
January 1, 1997 - December 31, 1997 $122,472
The Base Salary to be paid to Employee during any Additional Term shall be
an amount mutually agreed upon between the parties and shall be set forth on an
exhibit to this Agreement which shall be signed by both parties. The Base Salary
shall be payable in accordance with the Corporation's normal payroll schedule
and shall be less any applicable withholding taxes and FICA contributions.
3.2) Bonus. During the Initial Term, the Corporation may, but is not
obligated to, pay Employee an annual bonus (the "Annual Bonus") consisting of
stock options or a cash payment or both the amounts of which shall be determined
by the Compensation Committee of the Board of Directors, based in part on the
extent to which the Company's financial results meet, exceed or fall short of
various goals established for each fiscal year by the Compensation Committee of
the Board of Directors. Any Annual Bonus earned by Employee shall be paid within
ninety (90) days after the end of the Corporation's fiscal year, less applicable
withholding taxes and FICA contributions. The Annual Bonus to be paid to
Employee during any Additional Term shall be an amount mutually agreed upon
between the parties and shall be set forth on an exhibit to this Agreement which
shall be signed by both parties.
<PAGE>
3.3) Benefits. During the Term, Employee shall be eligible, at the
Corporation's expense, to participate in and to be covered by, each life
insurance, accident insurance, health insurance, disability insurance,
hospitalization or other plan, effective with respect to other officers of the
Corporation when Employee is eligible under the terms of any such plan, on the
same basis as shall be available to other officers of the Corporation. The
Corporation shall have the right to change the terms of any such plan in its
discretion from time to time. The Corporation shall provide Employee with such
increases to such benefits as are given to other officers of the Corporation.
Prior to termination of this Agreement, Employee shall have the right to
purchase at fair market value all policies of insurance which insure his life
and are owned by the Corporation or any subsidiary of the Corporation.
3.4) Vacation. During the Term, Employee shall be entitled to such
vacations as the Corporation and Employee may determine from time to time.
Employee shall not be compensated for unused vacation time, and any unused
vacation time shall be considered unearned and forfeited. For the purpose of
computing vacation time, the number of working days in a week shall be deemed to
be five (5) days and shall exclude Saturday and Sunday and any legal holiday on
which the offices of the Corporation are closed.
3.5) Business Expenses. During the Term, the Corporation shall reimburse
Employee for all ordinary and necessary business expenses incurred by Employee
in connection with the business of the Corporation and its subsidiaries and
consistent with the Corporation's policies in effect from time to time with
respect to travel, entertainment and other business expenses. Payment or
reimbursement to Employee shall be made upon submission by Employee of vouchers,
receipts or other evidence of such expense in a form reasonably satisfactory to
the Corporation and in compliance with applicable requirements of taxing
authorities. In the event the Board of Directors of the Corporation requests the
services of Employee outside the Mankato area, the Corporation shall reimburse
Employee for his reasonable transportation, lodging, and meal expense incurred
in compliance with such request.
3.6) Sick Pay. If Employee shall fail to render all of the services to the
Corporation or its subsidiaries provided for, or contemplated by, this Agreement
due to illness, physical or mental disability or incapacity ("Sick Leave"), the
Corporation shall pay Employee his Base Salary as provided in Section 3.1 ("Sick
Pay") for not more than twenty-six (26) weeks of Sick Leave. For the purpose of
computing Sick Leave and Sick Pay, the number of working days in a week for
Employee shall be deemed to be five (5) days and shall exclude Saturday and
Sunday. Employee shall not be compensated for unused Sick Pay or Sick Leave.
ARTICLE 4
TERMINATION
4.1) Termination. Subject to the provisions of Article 6, Employee's
employment under this Agreement may be terminated:
(a) By mutual written agreement of the parties;
(b) Upon the death of Employee;
(c) By the Corporation upon fifteen (15) days written notice to Employee
in the event that Employee, with reasonable accommodation, cannot
perform the essential functions of his job as a result of a physical
or mental disability. Nothing herein shall limit the right of either
party to terminate Employee's employment under one of the other
sections of Article 4 of this Agreement. For purposes of this
Agreement, "disability" shall mean (i) Sick Leave for a period or
periods aggregating twenty-six (26) weeks, or (ii) permanent and total
disability whether physical or mental, to such extent that Employee
is, and will permanently be, incapable of performing the essential and
normal duties required to fulfill his obligations to the Corporation.
Disability for purposes of Section 4.1(c) (ii) shall be determined by
a physician designated by the Corporation's Board of Directors. In the
event of a dispute as to disability pursuant to Section 4.1(c)(ii),
Employee's designated physician and the Corporation's designated
physician shall select a third physician who will make an independent
judgment, which shall be binding upon the parties.
<PAGE>
(d) By Employee, upon sixty (60) days prior written notice to the
Corporation.
(e) By the Corporation, upon ten (10) days written notice to Employee and
a determination to terminate this Agreement "for cause." The term "for
cause" shall mean gross neglect of Employee's duties, conduct
demonstrably and materially detrimental to the business reputation or
goodwill of the Corporation or its subsidiaries, dishonesty in any
dealings between Employee and the Corporation or between Employee and
vendors or customers of the Corporation or any of its subsidiaries,
conviction of any crime punishable as a felony involving moral
turpitude or immoral conduct, being under the influence of alcohol or
illegal drugs while on the job, refusal or failure to comply with
directives, rules, regulations or policies of the Corporation or its
Board of Directors, or violation of any term of this Agreement.
(f) By either party upon delivery of the Nonrenewal Notice as provided in
Section 1.2.
4.2) Continuation of Insurance Benefits. The insurance benefits provided to
Employee by the Corporation pursuant to Section 3.3 shall continue for (1) the
period of time during which the law requires continuation coverage, if
applicable, or (2) ninety (90) days after the termination date or for the period
of time required by the policy, whichever is less.
4.3) Delivery of Documents. Upon the end of the Term, whether voluntary or
involuntary, Employee agrees to promptly return to the Corporation all originals
and copies of business records, documents, other tangible property or
information relating in any way to the business of the Corporation or its
subsidiaries which have been received or generated by Employee or which came
into his possession during his employment by the Corporation.
<PAGE>
ARTICLE 5
RESTRICTION AGAINST COMPETITION; CONFIDENTIALITY
5.1) Restriction Against Competition. Employee acknowledges that he is
being employed in a position of trust and confidence and will have access to and
become familiar with the unique methods, services and procedures used by the
Corporation and that as part of Employee's duties, he will develop and maintain
close working relationships with vendors, customers and employees of the
Corporation and its subsidiaries. Employee further acknowledges that the
Corporation and its subsidiaries, over the years, through goodwill, advertising,
honest business methods and aggressive promotion, have built a lucrative
business and obtained loyal vendors and customers. Employee further acknowledges
that disclosure of any of the Corporation's confidential or proprietary
information, trade secrets or other information relating to the operation of the
business of the Corporation or its subsidiaries or use of or access to such
information by the Corporation's competitors, could have a serious detrimental
effect upon the Corporation, the monetary loss from which would be difficult, if
not impossible, to measure. In consequence of the foregoing, Employee agrees:
(a) Noncompetition. During Employee's employment and for a period of
two (2) years after termination of Employee's employment, except
if such termination is pursuant to Article 6, Employee agrees to
not directly or indirectly plan, organize, participate in or
engage in any business competitive with any product or service
marketed by the Corporation or any of its subsidiaries, or
conspire with others to do so, in the State of Minnesota or any
other state in which the Corporation or its subsidiaries are
located or have plans on the termination date to open a location.
Employee acknowledges that he shall be prevented from engaging in
the business as an individual, shareholder, owner, partner,
director, officer, employee, agent, or salesman for any person,
corporation, partnership or other entity and agrees that he will
not finance, facilitate, promote or encourage any person to
initiate or continue in the prohibited business for the period
provided.
(b) Nonsolicitation of Customers. Employee agrees he will not, during
a two-year period after termination of his employment hereunder,
except if such termination is pursuant to Article 6, attempt to
divert any business of the Corporation or its subsidiaries by
soliciting, contacting, or communicating with any customers of
the Corporation or its subsidiaries with whom Employee, or
employees under his supervision, had contacts during the year
preceding termination of his employment or any persons or
entities who might reasonably be considered within the class of
customers actively solicited by the Corporation or its
subsidiaries.
<PAGE>
(c) Nonsolicitation of Employees. Employee agrees he will not, during
a two-year period after termination of his employment, except if
such termination is pursuant to Article 6, solicit any present or
future employee of the Corporation or its subsidiaries for any
purpose of hiring or attempting to hire such employee, nor will
Employee in any manner attempt to persuade or encourage any of
the employees of the Corporation or its subsidiaries to
discontinue their employment with the Corporation or its
subsidiaries.
(d) Specific Performance and Injunctive Relief. Employee acknowledges
that the restrictions and covenants contained in this Article 5
are reasonable and necessary to protect the legitimate interests
of the Corporation. Employee understands and agrees that the
remedies at law for any violation of the restrictions or
covenants by this Article may be inadequate, that such violations
may cause irreparable injury within a short period of time and
that the Corporation shall be entitled to preliminary injunctive
relief and other injunctive relief against such violation without
the necessity of proving actual damages. Such injunctive relief
shall be in addition to and not in limitation of any and all
other remedies the Corporation shall have in law and at equity
for the enforcement of such restrictions and covenants. Nothing
herein provided shall be construed as prohibiting the Corporation
or Employee from pursuing any other remedies available in the
event of breach or threatened breach, including the recovery of
damages. And, in that regard, in the event that either the
Corporation or Employee shall violate any of the foregoing
provisions of this Article, the successful party shall have the
right to collect a reasonable attorney's fee for bringing such
legal or equitable action or otherwise enforcing the terms and
conditions of this Article.
(e) Confidential Information. Employee will not, during or after the
Term of this Agreement, directly or indirectly, disclose any of
the Corporation's confidential or proprietary information, trade
secrets or other information relating to the operation of the
business of the Corporation or its subsidiaries to any person,
firm, corporation, association, or other entity for any reason or
purpose whatsoever except the furtherance of the interests of the
Corporation or its subsidiaries, provided such information is,
through no fault of Employee, not otherwise in the public domain
or otherwise made known by the Corporation.
<PAGE>
ARTICLE 6
CHANGE IN CONTROL
6.1) Change of Control Right. For a period of two (2) years following a
Change in Control, as defined in Section 6.6(b), Employee shall have the right,
at any time and within Employee's sole discretion, to terminate employment with
the Corporation for Good Reason, as defined in Section 6.6(d). Such termination
shall be accomplished by, and effective upon, Employee giving written notice to
the Corporation of Employee's decision to terminate. Except as otherwise
expressly provided in this Agreement, upon exercise of said right, all
obligations and duties of Employee under this Agreement shall be of no further
force and effect.
6.2) Change of Control Termination Payment. In the event of a Change in
Control Termination, as defined in Section 6.6(c), then, and without further
action by the Board of Directors, the Compensation Committee of the Board of
Directors, if any, or otherwise, the Corporation shall pay to Employee an amount
equal to Employee's cash compensation (including salary and bonuses paid,but
excluding cash or non-cash fringe benefits such as car allowances) for the two
fiscal years preceding such termination, which amount shall be paid by the
Company in 24 equal monthly installments beginning on the first day of the month
following the month in which such termination occurs with the remaining payments
made on the first day of each of the succeeding 23 months.
6.3) Waiver of Non-Competition and Non-Recruitment Provisions.
Notwithstanding any other provision or language in this Agreement or any other
agreement or undertaking by Employee, in the event of a Change of Control
Termination, there shall be no prohibition or restriction with respect to
Employee's subsequent activities and Employee shall be free to pursue any
commercial activity, including any which is directly or indirectly competitive
with, or involves any recruitment with respect to, any part of the Corporation's
business, including but not limited to the Corporation's customers, vendors,
suppliers and employees.
6.4) Interest. In the event the Corporation does not make timely payment of
the Change of Control Termination amounts described in Section 6.2, Employee
shall be entitled to receive interest on any unpaid amount at the prime rate of
interest (or such comparable index as may be adopted) established from time to
time by the Norwest Bank Minnesota, N.A., Minneapolis, Minnesota.
6.5) Attorneys' Fees. In the event Employee incurs any legal expense to
enforce or defend his rights under Article 6 of this Agreement, or to recover
damages for breach thereof, Employee shall be entitled to recover from the
Corporation any reasonable expenses for attorneys' fees and disbursements
incurred.
6.6) Definitions. For purposes of this Article 6, the following definitions
shall be applied:
(a) "Continuing Directors" shall mean the directors of the
Corporation as of the date of execution of this Agreement and any
new director whose election to the Board of Directors or
nomination for election to the Board of Directors is approved by
a vote of at least two-thirds (2/3) of the directors as of the
date of execution of this Agreement who are then still in office.
(b) "Change of Control" shall mean any of the following events unless
approved in advance by a majority of the Continuing Directors:
(i) the acquisition of direct or indirect beneficial ownership
(as defined in Rule 13d-3 under the Securities Exchange Act
of 1934) in the aggregate of securities of the Corporation
representing twenty percent (20%) or more of the total
combined voting power of the Corporation's then issued and
outstanding securities by any person or entity, or group of
associated persons or entities acting in concert, except for
the officers and directors of the Company as of the date
this agreement is executed; or
<PAGE>
(ii) a merger or consolidation to which the Corporation is a
party if the individuals and entities who were shareholders
of the Corporation immediately prior to the effective date
of such merger or consolidation have beneficial ownership
(as defined in Rule 13d-3 under the Securities Exchange Act
of 1934) of less than fifty percent (50%) of the total
combined voting power for election of directors of the
surviving corporation following the effective date of such
merger or consolidation; or
(iii) the sale of the properties and assets of the Corporation,
substantially as an entirety, to any person or entity which
is not a wholly-owned subsidiary of the Corporation; or
(iv) the consummation of a plan of complete liquidation of the
Corporation or of an agreement for the sale or disposition
by the Corporation of all or substantially all of the
Corporation's business or assets; or
(v) a change in the composition of the Corporation's Board of
Directors at any time after the execution of this Agreement
such that the Continuing Directors cease for any reason to
constitute at least a seventy percent (70%) majority of the
Board.
(c) "Change of Control Termination" shall mean with respect to
Employee, any of the following events occurring within two (2)
years after a Change of Control:
(i) Termination of Employee's employment by the Corporation for
any reason, other than pursuant to Section 4.1(a) or (c),
except for conduct by Employee constituting a felony; or
(ii) Termination of employment with the Corporation by Employee
pursuant to Section 6.1. A Change of Control Termination by
Employee shall not include termination by reason of death.
(d) "Good Reason" shall mean a good faith determination by Employee,
in Employee's sole and absolute judgment, that one or more of the
following events has occurred, without Employee's express written
consent, after a Change of Control:
(i) A change in Employee's reporting responsibilities, titles or
offices as in effect immediately prior to the Change of
Control, or any removal of Employee from, or any failure to
re-elect Employee to, any of such positions, which has the
effect of diminishing Employee's responsibility or
authority;
(ii) A reduction by the Corporation in Employee's Base Salary or
Annual Bonus as in effect immediately prior to the Change of
Control or as the same may be increased from time to time;
<PAGE>
(iii) The Corporation requiring Employee to be based anywhere
other than within twenty-five (25) miles of Employee's job
location at the time of the Change of Control;
(iv) Without replacement by a plan, program, or arrangement
providing benefits to Employee of the Corporation and its
subsidiaries equal to or greater than those discontinued or
adversely affected, the failure by the Corporation to
continue in effect, within its maximum stated term, any
pension, bonus, incentive, stock ownership, purchase,
option, life insurance, health, accident, disability, or any
other employee compensation or benefit plan, program or
arrangement, in which Employee is participating immediately
prior to a Change of Control or the taking of any action by
the Corporation that would adversely affect Employee's
participation or materially reduce Employee's benefits under
any of such plans, programs or arrangements;
(v) The taking of any action by the Corporation that would
materially or adversely affect the physical conditions
existing at the time of the Change of Control in or under
which Employee performs his employment duties;
(vi) The taking of any action by the Corporation that would
materially change the Corporation's business strategies or
practices existing at the time of the Change of Control,
including but not limited to changes in the types and brands
of products offered, advertising and promotion programs,
employment policies, and the segment to which the
Corporation markets its products; or
(vii) Termination of employment by the Corporation of any of the
officers or administrative support staff of the Corporation
or any of its subsidiaries who held such positions at the
time of the Change of Control.
ARTICLE 7
MISCELLANEOUS
7.1) Severability. If any term or provision of this Agreement shall be held
to be invalid or unenforceable for any reason, such term or provision shall be
ineffective to the extent of such invalidity or unenforceability without
invalidating the remaining terms or provisions of this Agreement. Without in any
way limiting the generality of the foregoing, if any provision of Article 5
shall be determined by any court of competent jurisdiction to be unenforceable
by reason of its extending for too long a period of time or over too great a
geographical area, such provision shall be interpreted to extend over only the
maximum period of time during which it may be enforced and to apply only to the
maximum geographical area in which it may be enforced, as the case may be.
<PAGE>
7.2) Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient, if given in person or if in writing, sent by
certified mail, return receipt requested, to the last known residence address in
the case of Employee or to its principal office in the case of the Corporation.
7.3) Waiver of Breach. The waiver by either party hereto of the breach of
any provision of this Agreement shall not operate or be construed as a waiver of
any subsequent breach by any party.
7.4) Entire Agreement. This Agreement contains the entire agreement of the
parties concerning the employment of Employee by the Corporation. This Agreement
may not be changed orally, but only by an agreement in writing signed by the
parties against whom enforcement of any waiver, change, modification, extension
or discharge is sought.
7.5) Governing Law. This Agreement shall be construed and interpreted
according to the laws of the State of Minnesota.
7.6) Headings. The captions set forth in this Agreement are for convenience
only and shall not be considered a part of this Agreement or in any way limiting
or amplifying the terms or provisions hereof.
7.7) Obligations Which Survive Termination. The obligations and remedies of
Sections 4.2, 4.3, 6.2 and Article 5 of this Agreement shall survive the
execution and termination of this Agreement, except as expressly otherwise
provided for in this Agreement.
7.8) Assignment. The Corporation may assign its rights and delegate its
responsibilities under this Agreement to any person or entity which acquires all
or substantially all of the operating assets of the Corporation by merger,
consolidation, dissolution, liquidation, combination, sale or transfer of assets
or otherwise. Employee may not assign any of his rights or obligations under
this Agreement.
7.9) Counterparts. This Agreement may be executed simultaneously into two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
WINLAND ELECTRONICS, INC.
By /s/ S. Robert Dessalet
Its Director
/s/ W. Kirk Hankins
W. Kirk Hankins
EMPLOYMENT AGREEMENT
This Agreement is made effective as of this 15th day of May, 1995 between
Winland Electronics, Inc., a Minnesota corporation (the "Corporation"), and
Lorin E. Krueger ("Employee").
R E C I T A L S:
A. Employee is presently employed by the Corporation as Senior Vice
President of Operations of the Corporation.
B. The Corporation believes Employee is valuable to the future growth of
the Corporation and its business.
C. Employee and the Corporation desire to enter into an agreement to set
forth the relationship between the parties.
D. The Corporation has agreed to grant to Employee a stock option for the
purchase of 10,000 shares of the Corporation's Common Stock as consideration for
entering into this Agreement and in particular the noncompetition provisions of
Article 5.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE 1
EMPLOYMENT; TERM OF EMPLOYMENT
1.1) Employment. The Corporation hereby employs Employee and Employee
hereby accepts employment upon the terms and conditions hereinafter set forth.
1.2) Term. The term (the "Initial Term") of Employee's employment under
this Agreement shall commence on May 15, 1995, and continue thereafter until
December 31, 1997, unless sooner terminated in accordance with the provisions of
this Agreement. Either party may terminate this Agreement at the end of the
Initial Term (or any Additional Term) by giving to the other party sixty (60)
days written notice (the "Nonrenewal Notice"). If the Nonrenewal Notice is not
given, the Term shall be extended for an additional period of one (l) year (an
"Additional Term"), upon the terms and conditions provided herein. "Term" shall
mean the Initial Term and any Additional Terms.
<PAGE>
ARTICLE 2
DUTIES; EXTENT OF SERVICES
2.1) Duties. During the Initial Term, Employee shall be employed as Senior
Vice President of Operations of the Corporation and/or such other positions to
which the Board of Directors of the Corporation may appoint Employee. During the
Additional Terms, Employee agrees to be employed in such position(s) determined
by mutual agreement between Employee and the Board of Directors of the
Corporation for each Additional Term. Employee shall have such responsibilities
as the Bylaws of the Corporation may assign to the person serving in such
position subject to the authority of the Board of Directors of the Corporation
or such other person(s) as such Boards of Directors may designate from time to
time. Employee further agrees to abide by reasonable rules, regulations,
policies and programs established by the Board of Directors of the Corporation
in performance of his duties.
2.2) Extent of Service. Employee shall devote his full time and attention
and energies to the business of the Corporation and its subsidiaries, perform
such services as shall be from time to time designated by the Board of Directors
and use his best efforts to promote the interests of the Corporation and its
subsidiaries.
ARTICLE 3
COMPENSATION
3.1) Base Salary. For each fiscal year of the Corporation during the
Initial Term, the Corporation shall pay Employee an annual base salary ("Base
Salary") in the amount set forth below opposite the applicable fiscal year or
such greater amount as may be determined by the Compensation Committee of the
Corporation's Board of Directors:
Fiscal Year Base Salary
May 15, 1995 - December 31, 1995 $48,750
January 1, 1996 - December 31, 1996 $84,240
January 1, 1997 - December 31, 1997 $90,979
The Base Salary to be paid to Employee during any Additional Term shall be
an amount mutually agreed upon between the parties and shall be set forth on an
exhibit to this Agreement which shall be signed by both parties. The Base Salary
shall be payable in accordance with the Corporation's normal payroll schedule
and shall be less any applicable withholding taxes and FICA contributions.
3.2) Bonus. During the Initial Term, the Corporation may, but is not
obligated to, pay Employee an annual bonus (the "Annual Bonus") consisting of
stock options or a cash payment or both the amounts of which shall be determined
by the Compensation Committee of the Board of Directors, based in part on the
extent to which the Company's financial results meet, exceed or fall short of
various goals established for each fiscal year by the Compensation Committee of
the Board of Directors. Any Annual Bonus earned by Employee shall be paid within
ninety (90) days after the end of the Corporation's fiscal year, less applicable
withholding taxes and FICA contributions. The Annual Bonus to be paid to
Employee during any Additional Term shall be an amount mutually agreed upon
between the parties and shall be set forth on an exhibit to this Agreement which
shall be signed by both parties.
<PAGE>
3.3) Benefits. During the Term, Employee shall be eligible, at the
Corporation's expense, to participate in and to be covered by, each life
insurance, accident insurance, health insurance, disability insurance,
hospitalization or other plan, effective with respect to other officers of the
Corporation when Employee is eligible under the terms of any such plan, on the
same basis as shall be available to other officers of the Corporation. The
Corporation shall have the right to change the terms of any such plan in its
discretion from time to time. The Corporation shall provide Employee with such
increases to such benefits as are given to other officers of the Corporation.
Prior to termination of this Agreement, Employee shall have the right to
purchase at fair market value all policies of insurance which insure his life
and are owned by the Corporation or any subsidiary of the Corporation.
3.4) Vacation. During the Term, Employee shall be entitled to such
vacations as the Corporation and Employee may determine from time to time.
Employee shall not be compensated for unused vacation time, and any unused
vacation time shall be considered unearned and forfeited. For the purpose of
computing vacation time, the number of working days in a week shall be deemed to
be five (5) days and shall exclude Saturday and Sunday and any legal holiday on
which the offices of the Corporation are closed.
3.5) Business Expenses. During the Term, the Corporation shall reimburse
Employee for all ordinary and necessary business expenses incurred by Employee
in connection with the business of the Corporation and its subsidiaries and
consistent with the Corporation's policies in effect from time to time with
respect to travel, entertainment and other business expenses. Payment or
reimbursement to Employee shall be made upon submission by Employee of vouchers,
receipts or other evidence of such expense in a form reasonably satisfactory to
the Corporation and in compliance with applicable requirements of taxing
authorities. In the event the Board of Directors of the Corporation requests the
services of Employee outside the Mankato area, the Corporation shall reimburse
Employee for his reasonable transportation, lodging, and meal expense incurred
in compliance with such request.
3.6) Sick Pay. If Employee shall fail to render all of the services to the
Corporation or its subsidiaries provided for, or contemplated by, this Agreement
due to illness, physical or mental disability or incapacity ("Sick Leave"), the
Corporation shall pay Employee his Base Salary as provided in Section 3.1 ("Sick
Pay") for not more than twenty-six (26) weeks of Sick Leave. For the purpose of
computing Sick Leave and Sick Pay, the number of working days in a week for
Employee shall be deemed to be five (5) days and shall exclude Saturday and
Sunday. Employee shall not be compensated for unused Sick Pay or Sick Leave.
ARTICLE 4
TERMINATION
4.1) Termination. Subject to the provisions of Article 6, Employee's
employment under this Agreement may be terminated:
<PAGE>
(a) By mutual written agreement of the parties;
(b) Upon the death of Employee;
(c) By the Corporation upon fifteen (15) days written notice to
Employee in the event that Employee, with reasonable
accommodation, cannot perform the essential functions of his job
as a result of a physical or mental disability. Nothing herein
shall limit the right of either party to terminate Employee's
employment under one of the other sections of Article 4 of this
Agreement. For purposes of this Agreement, "disability" shall
mean (i) Sick Leave for a period or periods aggregating
twenty-six (26) weeks, or (ii) permanent and total disability
whether physical or mental, to such extent that Employee is, and
will permanently be, incapable of performing the essential and
normal duties required to fulfill his obligations to the
Corporation. Disability for purposes of Section 4.1(c) (ii) shall
be determined by a physician designated by the Corporation's
Board of Directors. In the event of a dispute as to disability
pursuant to Section 4.1(c)(ii), Employee's designated physician
and the Corporation's designated physician shall select a third
physician who will make an independent judgment, which shall be
binding upon the parties.
(d) By Employee, upon sixty (60) days prior written notice to the
Corporation.
(e) By the Corporation, upon ten (10) days written notice to Employee
and a determination to terminate this Agreement "for cause." The
term "for cause" shall mean gross neglect of Employee's duties,
conduct demonstrably and materially detrimental to the business
reputation or goodwill of the Corporation or its subsidiaries,
dishonesty in any dealings between Employee and the Corporation
or between Employee and vendors or customers of the Corporation
or any of its subsidiaries, conviction of any crime punishable as
a felony involving moral turpitude or immoral conduct, being
under the influence of alcohol or illegal drugs while on the job,
refusal or failure to comply with directives, rules, regulations
or policies of the Corporation or its Board of Directors, or
violation of any term of this Agreement.
(f) By either party upon delivery of the Nonrenewal Notice as
provided in Section 1.2.
4.2) Continuation of Insurance Benefits. The insurance benefits provided to
Employee by the Corporation pursuant to Section 3.3 shall continue for (1) the
period of time during which the law requires continuation coverage, if
applicable, or (2) ninety (90) days after the termination date or for the period
of time required by the policy, whichever is less.
4.3) Delivery of Documents. Upon the end of the Term, whether voluntary or
involuntary, Employee agrees to promptly return to the Corporation all originals
and copies of business records, documents, other tangible property or
information relating in any way to the business of the Corporation or its
subsidiaries which have been received or generated by Employee or which came
into his possession during his employment by the Corporation.
<PAGE>
ARTICLE 5
RESTRICTION AGAINST COMPETITION; CONFIDENTIALITY
5.1) Restriction Against Competition. Employee acknowledges that he is
being employed in a position of trust and confidence and will have access to and
become familiar with the unique methods, services and procedures used by the
Corporation and that as part of Employee's duties, he will develop and maintain
close working relationships with vendors, customers and employees of the
Corporation and its subsidiaries. Employee further acknowledges that the
Corporation and its subsidiaries, over the years, through goodwill, advertising,
honest business methods and aggressive promotion, have built a lucrative
business and obtained loyal vendors and customers. Employee further acknowledges
that disclosure of any of the Corporation's confidential or proprietary
information, trade secrets or other information relating to the operation of the
business of the Corporation or its subsidiaries or use of or access to such
information by the Corporation's competitors, could have a serious detrimental
effect upon the Corporation, the monetary loss from which would be difficult, if
not impossible, to measure. In consequence of the foregoing, Employee agrees:
(a) Noncompetition. During Employee's employment and for a period of
two (2) years after termination of Employee's employment, except
if such termination is pursuant to Article 6, Employee agrees to
not directly or indirectly plan, organize, participate in or
engage in any business competitive with any product or service
marketed by the Corporation or any of its subsidiaries, or
conspire with others to do so, in the State of Minnesota or any
other state in which the Corporation or its subsidiaries are
located or have plans on the termination date to open a location.
Employee acknowledges that he shall be prevented from engaging in
the business as an individual, shareholder, owner, partner,
director, officer, employee, agent, or salesman for any person,
corporation, partnership or other entity and agrees that he will
not finance, facilitate, promote or encourage any person to
initiate or continue in the prohibited business for the period
provided.
(b) Nonsolicitation of Customers. Employee agrees he will not, during
a two-year period after termination of his employment hereunder,
except if such termination is pursuant to Article 6, attempt to
divert any business of the Corporation or its subsidiaries by
soliciting, contacting, or communicating with any customers of
the Corporation or its subsidiaries with whom Employee, or
employees under his supervision, had contacts during the year
preceding termination of his employment or any persons or
entities who might reasonably be considered within the class of
customers actively solicited by the Corporation or its
subsidiaries.
(c) Nonsolicitation of Employees. Employee agrees he will not, during
a two-year period after termination of his employment, except if
such termination is pursuant to Article 6, solicit any present or
future employee of the Corporation or its subsidiaries for any
purpose of hiring or attempting to hire such employee, nor will
Employee in any manner attempt to persuade or encourage any of
the employees of the Corporation or its subsidiaries to
discontinue their employment with the Corporation or its
subsidiaries.
<PAGE>
(d) Specific Performance and Injunctive Relief. Employee acknowledges
that the restrictions and covenants contained in this Article 5
are reasonable and necessary to protect the legitimate interests
of the Corporation. Employee understands and agrees that the
remedies at law for any violation of the restrictions or
covenants by this Article may be inadequate, that such violations
may cause irreparable injury within a short period of time and
that the Corporation shall be entitled to preliminary injunctive
relief and other injunctive relief against such violation without
the necessity of proving actual damages. Such injunctive relief
shall be in addition to and not in limitation of any and all
other remedies the Corporation shall have in law and at equity
for the enforcement of such restrictions and covenants. Nothing
herein provided shall be construed as prohibiting the Corporation
or Employee from pursuing any other remedies available in the
event of breach or threatened breach, including the recovery of
damages. And, in that regard, in the event that either the
Corporation or Employee shall violate any of the foregoing
provisions of this Article, the successful party shall have the
right to collect a reasonable attorney's fee for bringing such
legal or equitable action or otherwise enforcing the terms and
conditions of this Article.
(e) Confidential Information. Employee will not, during or after the
Term of this Agreement, directly or indirectly, disclose any of
the Corporation's confidential or proprietary information, trade
secrets or other information relating to the operation of the
business of the Corporation or its subsidiaries to any person,
firm, corporation, association, or other entity for any reason or
purpose whatsoever except the furtherance of the interests of the
Corporation or its subsidiaries, provided such information is,
through no fault of Employee, not otherwise in the public domain
or otherwise made known by the Corporation.
ARTICLE 6
CHANGE IN CONTROL
6.1) Change of Control Right. For a period of two (2) years following a
Change in Control, as defined in Section 6.6(b), Employee shall have the right,
at any time and within Employee's sole discretion, to terminate employment with
the Corporation for Good Reason, as defined in Section 6.6(d). Such termination
shall be accomplished by, and effective upon, Employee giving written notice to
the Corporation of Employee's decision to terminate. Except as otherwise
expressly provided in this Agreement, upon exercise of said right, all
obligations and duties of Employee under this Agreement shall be of no further
force and effect.
6.2) Change of Control Termination Payment. In the event of a Change in
Control Termination, as defined in Section 6.6(c), then, and without further
action by the Board of Directors, the Compensation Committee of the Board of
Directors, if any, or otherwise, the Corporation shall pay to Employee an amount
equal to Employee's cash compensation (including salary and bonuses paid,but
excluding cash or non-cash fringe benefits such as car allowances) for the two
fiscal years preceding such termination, which amount shall be paid by the
Company in 24 equal monthly installments beginning on the first day of the month
following the month in which such termination occurs with the remaining payments
made on the first day of each of the succeeding 23 months.
6.3) Waiver of Non-Competition and Non-Recruitment Provisions.
Notwithstanding any other provision or language in this Agreement or any other
agreement or undertaking by Employee, in the event of a Change of Control
Termination, there shall be no prohibition or restriction with respect to
Employee's subsequent activities and Employee shall be free to pursue any
commercial activity, including any which is directly or indirectly competitive
with, or involves any recruitment with respect to, any part of the Corporation's
business, including but not limited to the Corporation's customers, vendors,
suppliers and employees.
<PAGE>
6.4) Interest. In the event the Corporation does not make timely payment of
the Change of Control Termination amounts described in Section 6.2, Employee
shall be entitled to receive interest on any unpaid amount at the prime rate of
interest (or such comparable index as may be adopted) established from time to
time by the Norwest Bank Minnesota, N.A., Minneapolis, Minnesota.
6.5) Attorneys' Fees. In the event Employee incurs any legal expense to
enforce or defend his rights under Article 6 of this Agreement, or to recover
damages for breach thereof, Employee shall be entitled to recover from the
Corporation any reasonable expenses for attorneys' fees and disbursements
incurred.
6.6) Definitions. For purposes of this Article 6, the following definitions
shall be applied:
(a) "Continuing Directors" shall mean the directors of the
Corporation as of the date of execution of this Agreement and any
new director whose election to the Board of Directors or
nomination for election to the Board of Directors is approved by
a vote of at least two-thirds (2/3) of the directors as of the
date of execution of this Agreement who are then still in office.
(b) "Change of Control" shall mean any of the following events unless
approved in advance by a majority of the Continuing Directors:
(i) the acquisition of direct or indirect beneficial ownership
(as defined in Rule 13d-3 under the Securities Exchange Act
of 1934) in the aggregate of securities of the Corporation
representing twenty percent (20%) or more of the total
combined voting power of the Corporation's then issued and
outstanding securities by any person or entity, or group of
associated persons or entities acting in concert, except for
the officers and directors of the Company as of the date
this agreement is executed; or
(ii) a merger or consolidation to which the Corporation is a
party if the individuals and entities who were shareholders
of the Corporation immediately prior to the effective date
of such merger or consolidation have beneficial ownership
(as defined in Rule 13d-3 under the Securities Exchange Act
of 1934) of less than fifty percent (50%) of the total
combined voting power for election of directors of the
surviving corporation following the effective date of such
merger or consolidation; or
(iii) the sale of the properties and assets of the Corporation,
substantially as an entirety, to any person or entity which
is not a wholly-owned subsidiary of the Corporation; or
<PAGE>
(iv) the consummation of a plan of complete liquidation of the
Corporation or of an agreement for the sale or disposition
by the Corporation of all or substantially all of the
Corporation's business or assets; or
(v) a change in the composition of the Corporation's Board of
Directors at any time after the execution of this Agreement
such that the Continuing Directors cease for any reason to
constitute at least a seventy percent (70%) majority of the
Board.
(c) "Change of Control Termination" shall mean with respect to
Employee, any of the following events occurring within two (2)
years after a Change of Control:
(i) Termination of Employee's employment by the Corporation for
any reason, other than pursuant to Section 4.1(a) or (c),
except for conduct by Employee constituting a felony; or
(ii) Termination of employment with the Corporation by Employee
pursuant to Section 6.1. A Change of Control Termination by
Employee shall not include termination by reason of death.
(d) "Good Reason" shall mean a good faith determination by Employee,
in Employee's sole and absolute judgment, that one or more of the
following events has occurred, without Employee's express written
consent, after a Change of Control:
(i) A change in Employee's reporting responsibilities, titles or
offices as in effect immediately prior to the Change of
Control, or any removal of Employee from, or any failure to
re-elect Employee to, any of such positions, which has the
effect of diminishing Employee's responsibility or
authority;
(ii) A reduction by the Corporation in Employee's Base Salary or
Annual Bonus as in effect immediately prior to the Change of
Control or as the same may be increased from time to time;
(iii) The Corporation requiring Employee to be based anywhere
other than within twenty-five (25) miles of Employee's job
location at the time of the Change of Control;
<PAGE>
(iv) Without replacement by a plan, program, or arrangement
providing benefits to Employee of the Corporation and its
subsidiaries equal to or greater than those discontinued or
adversely affected, the failure by the Corporation to
continue in effect, within its maximum stated term, any
pension, bonus, incentive, stock ownership, purchase,
option, life insurance, health, accident, disability, or any
other employee compensation or benefit plan, program or
arrangement, in which Employee is participating immediately
prior to a Change of Control or the taking of any action by
the Corporation that would adversely affect Employee's
participation or materially reduce Employee's benefits under
any of such plans, programs or arrangements;
(v) The taking of any action by the Corporation that would
materially or adversely affect the physical conditions
existing at the time of the Change of Control in or under
which Employee performs his employment duties;
(vi) The taking of any action by the Corporation that would
materially change the Corporation's business strategies or
practices existing at the time of the Change of Control,
including but not limited to changes in the types and brands
of products offered, advertising and promotion programs,
employment policies, and the segment to which the
Corporation markets its products; or
(vii) Termination of employment by the Corporation of any of the
officers or administrative support staff of the Corporation
or any of its subsidiaries who held such positions at the
time of the Change of Control.
<PAGE>
ARTICLE 7
MISCELLANEOUS
7.1) Severability. If any term or provision of this Agreement shall be held
to be invalid or unenforceable for any reason, such term or provision shall be
ineffective to the extent of such invalidity or unenforceability without
invalidating the remaining terms or provisions of this Agreement. Without in any
way limiting the generality of the foregoing, if any provision of Article 5
shall be determined by any court of competent jurisdiction to be unenforceable
by reason of its extending for too long a period of time or over too great a
geographical area, such provision shall be interpreted to extend over only the
maximum period of time during which it may be enforced and to apply only to the
maximum geographical area in which it may be enforced, as the case may be.
7.2) Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient, if given in person or if in writing, sent by
certified mail, return receipt requested, to the last known residence address in
the case of Employee or to its principal office in the case of the Corporation.
7.3) Waiver of Breach. The waiver by either party hereto of the breach of
any provision of this Agreement shall not operate or be construed as a waiver of
any subsequent breach by any party.
7.4) Entire Agreement. This Agreement contains the entire agreement of the
parties concerning the employment of Employee by the Corporation. This Agreement
may not be changed orally, but only by an agreement in writing signed by the
parties against whom enforcement of any waiver, change, modification, extension
or discharge is sought.
7.5) Governing Law. This Agreement shall be construed and interpreted
according to the laws of the State of Minnesota.
7.6) Headings. The captions set forth in this Agreement are for convenience
only and shall not be considered a part of this Agreement or in any way limiting
or amplifying the terms or provisions hereof.
7.7) Obligations Which Survive Termination. The obligations and remedies of
Sections 4.2, 4.3, 6.2 and Article 5 of this Agreement shall survive the
execution and termination of this Agreement, except as expressly otherwise
provided for in this Agreement.
7.8) Assignment. The Corporation may assign its rights and delegate its
responsibilities under this Agreement to any person or entity which acquires all
or substantially all of the operating assets of the Corporation by merger,
consolidation, dissolution, liquidation, combination, sale or transfer of assets
or otherwise. Employee may not assign any of his rights or obligations under
this Agreement.
7.9) Counterparts. This Agreement may be executed simultaneously into two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
WINLAND ELECTRONICS, INC.
By /s/ S. Robert Dessalet
Its Director
/s/ Lorin E. Krueger
Lorin E. Krueger
EMPLOYMENT AGREEMENT
This Agreement is made effective as of this 15th day of July, 1995 between
Winland Electronics, Inc., a Minnesota corporation (the "Corporation"), and Kirk
P. Hankins ("Employee").
R E C I T A L S:
A. Employee is presently employed by the Corporation as Vice President of
Marketing of the Corporation.
B. The Corporation believes Employee is valuable to the future growth of
the Corporation and its business.
C. Employee and the Corporation desire to enter into an agreement to set
forth the relationship between the parties.
D. The Corporation has agreed to grant to Employee a stock option for the
purchase of 10,000 shares of the Corporation's Common Stock as consideration for
entering into this Agreement and in particular the noncompetition provisions of
Article 5.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE 1
EMPLOYMENT; TERM OF EMPLOYMENT
1.1) Employment. The Corporation hereby employs Employee and Employee
hereby accepts employment upon the terms and conditions hereinafter set forth.
1.2) Term. The term (the "Initial Term") of Employee's employment under
this Agreement shall commence on July 15, 1995, and continue thereafter until
December 31, 1997, unless sooner terminated in accordance with the provisions of
this Agreement. Either party may terminate this Agreement at the end of the
Initial Term (or any Additional Term) by giving to the other party sixty (60)
days written notice (the "Nonrenewal Notice"). If the Nonrenewal Notice is not
given, the Term shall be extended for an additional period of one (l) year (an
"Additional Term"), upon the terms and conditions provided herein. "Term" shall
mean the Initial Term and any Additional Terms.
<PAGE>
ARTICLE 2
DUTIES; EXTENT OF SERVICES
2.1) Duties. During the Initial Term, Employee shall be employed as Vice
President of Marketing of the Corporation and/or such other positions to which
the Board of Directors of the Corporation may appoint Employee. During the
Additional Terms, Employee agrees to be employed in such position(s) determined
by mutual agreement between Employee and the Board of Directors of the
Corporation for each Additional Term. Employee shall have such responsibilities
as the Bylaws of the Corporation may assign to the person serving in such
position subject to the authority of the Board of Directors of the Corporation
or such other person(s) as such Boards of Directors may designate from time to
time. Employee further agrees to abide by reasonable rules, regulations,
policies and programs established by the Board of Directors of the Corporation
in performance of his duties.
2.2) Extent of Service. Employee shall devote his full time and attention
and energies to the business of the Corporation and its subsidiaries, perform
such services as shall be from time to time designated by the Board of Directors
and use his best efforts to promote the interests of the Corporation and its
subsidiaries.
ARTICLE 3
COMPENSATION
3.1) Base Salary. For each fiscal year of the Corporation during the
Initial Term, the Corporation shall pay Employee an annual base salary ("Base
Salary") in the amount set forth below opposite the applicable fiscal year or
such greater amount as may be determined by the Compensation Committee of the
Corporation's Board of Directors:
Fiscal Year Base Salary
July 15, 1995 - December 31, 1995 $27,958
January 1, 1996 - December 31, 1996 $65,880
January 1, 1997 - December 31, 1997 $71,150
The Base Salary to be paid to Employee during any Additional Term shall be
an amount mutually agreed upon between the parties and shall be set forth on an
exhibit to this Agreement which shall be signed by both parties. The Base Salary
shall be payable in accordance with the Corporation's normal payroll schedule
and shall be less any applicable withholding taxes and FICA contributions.
3.2) Bonus. During the Initial Term, the Corporation may, but is not
obligated to, pay Employee an annual bonus (the "Annual Bonus") consisting of
stock options or a cash payment or both the amounts of which shall be determined
by the Compensation Committee of the Board of Directors, based in part on the
extent to which the Company's financial results meet, exceed or fall short of
various goals established for each fiscal year by the Compensation Committee of
the Board of Directors. Any Annual Bonus earned by Employee shall be paid within
ninety (90) days after the end of the Corporation's fiscal year, less applicable
withholding taxes and FICA contributions. The Annual Bonus to be paid to
Employee during any Additional Term shall be an amount mutually agreed upon
between the parties and shall be set forth on an exhibit to this Agreement which
shall be signed by both parties.
<PAGE>
3.3) Benefits. During the Term, Employee shall be eligible, at the
Corporation's expense, to participate in and to be covered by, each life
insurance, accident insurance, health insurance, disability insurance,
hospitalization or other plan, effective with respect to other officers of the
Corporation when Employee is eligible under the terms of any such plan, on the
same basis as shall be available to other officers of the Corporation. The
Corporation shall have the right to change the terms of any such plan in its
discretion from time to time. The Corporation shall provide Employee with such
increases to such benefits as are given to other officers of the Corporation.
Prior to termination of this Agreement, Employee shall have the right to
purchase at fair market value all policies of insurance which insure his life
and are owned by the Corporation or any subsidiary of the Corporation.
3.4) Vacation. During the Term, Employee shall be entitled to such
vacations as the Corporation and Employee may determine from time to time.
Employee shall not be compensated for unused vacation time, and any unused
vacation time shall be considered unearned and forfeited. For the purpose of
computing vacation time, the number of working days in a week shall be deemed to
be five (5) days and shall exclude Saturday and Sunday and any legal holiday on
which the offices of the Corporation are closed.
3.5) Business Expenses. During the Term, the Corporation shall reimburse
Employee for all ordinary and necessary business expenses incurred by Employee
in connection with the business of the Corporation and its subsidiaries and
consistent with the Corporation's policies in effect from time to time with
respect to travel, entertainment and other business expenses. Payment or
reimbursement to Employee shall be made upon submission by Employee of vouchers,
receipts or other evidence of such expense in a form reasonably satisfactory to
the Corporation and in compliance with applicable requirements of taxing
authorities. In the event the Board of Directors of the Corporation requests the
services of Employee outside the Mankato area, the Corporation shall reimburse
Employee for his reasonable transportation, lodging, and meal expense incurred
in compliance with such request.
3.6) Sick Pay. If Employee shall fail to render all of the services to the
Corporation or its subsidiaries provided for, or contemplated by, this Agreement
due to illness, physical or mental disability or incapacity ("Sick Leave"), the
Corporation shall pay Employee his Base Salary as provided in Section 3.1 ("Sick
Pay") for not more than twenty-six (26) weeks of Sick Leave. For the purpose of
computing Sick Leave and Sick Pay, the number of working days in a week for
Employee shall be deemed to be five (5) days and shall exclude Saturday and
Sunday. Employee shall not be compensated for unused Sick Pay or Sick Leave.
ARTICLE 4
TERMINATION
4.1) Termination. Subject to the provisions of Article 6, Employee's
employment under this Agreement may be terminated:
<PAGE>
(a) By mutual written agreement of the parties;
(b) Upon the death of Employee;
(c) By the Corporation upon fifteen (15) days written notice to
Employee in the event that Employee, with reasonable
accommodation, cannot perform the essential functions of his job
as a result of a physical or mental disability. Nothing herein
shall limit the right of either party to terminate Employee's
employment under one of the other sections of Article 4 of this
Agreement. For purposes of this Agreement, "disability" shall
mean (i) Sick Leave for a period or periods aggregating
twenty-six (26) weeks, or (ii) permanent and total disability
whether physical or mental, to such extent that Employee is, and
will permanently be, incapable of performing the essential and
normal duties required to fulfill his obligations to the
Corporation. Disability for purposes of Section 4.1(c) (ii) shall
be determined by a physician designated by the Corporation's
Board of Directors. In the event of a dispute as to disability
pursuant to Section 4.1(c)(ii), Employee's designated physician
and the Corporation's designated physician shall select a third
physician who will make an independent judgment, which shall be
binding upon the parties.
(d) By Employee, upon sixty (60) days prior written notice to the
Corporation.
(e) By the Corporation, upon ten (10) days written notice to Employee
and a determination to terminate this Agreement "for cause." The
term "for cause" shall mean gross neglect of Employee's duties,
conduct demonstrably and materially detrimental to the business
reputation or goodwill of the Corporation or its subsidiaries,
dishonesty in any dealings between Employee and the Corporation
or between Employee and vendors or customers of the Corporation
or any of its subsidiaries, conviction of any crime punishable as
a felony involving moral turpitude or immoral conduct, being
under the influence of alcohol or illegal drugs while on the job,
refusal or failure to comply with directives, rules, regulations
or policies of the Corporation or its Board of Directors, or
violation of any term of this Agreement.
(f) By either party upon delivery of the Nonrenewal Notice as
provided in Section 1.2.
4.2) Continuation of Insurance Benefits. The insurance benefits provided to
Employee by the Corporation pursuant to Section 3.3 shall continue for (1) the
period of time during which the law requires continuation coverage, if
applicable, or (2) ninety (90) days after the termination date or for the period
of time required by the policy, whichever is less.
4.3) Delivery of Documents. Upon the end of the Term, whether voluntary or
involuntary, Employee agrees to promptly return to the Corporation all originals
and copies of business records, documents, other tangible property or
information relating in any way to the business of the Corporation or its
subsidiaries which have been received or generated by Employee or which came
into his possession during his employment by the Corporation.
<PAGE>
ARTICLE 5
RESTRICTION AGAINST COMPETITION; CONFIDENTIALITY
5.1) Restriction Against Competition. Employee acknowledges that he is
being employed in a position of trust and confidence and will have access to and
become familiar with the unique methods, services and procedures used by the
Corporation and that as part of Employee's duties, he will develop and maintain
close working relationships with vendors, customers and employees of the
Corporation and its subsidiaries. Employee further acknowledges that the
Corporation and its subsidiaries, over the years, through goodwill, advertising,
honest business methods and aggressive promotion, have built a lucrative
business and obtained loyal vendors and customers. Employee further acknowledges
that disclosure of any of the Corporation's confidential or proprietary
information, trade secrets or other information relating to the operation of the
business of the Corporation or its subsidiaries or use of or access to such
information by the Corporation's competitors, could have a serious detrimental
effect upon the Corporation, the monetary loss from which would be difficult, if
not impossible, to measure. In consequence of the foregoing, Employee agrees:
(a) Noncompetition. During Employee's employment and for a period of
two (2) years after termination of Employee's employment, except
if such termination is pursuant to Article 6, Employee agrees to
not directly or indirectly plan, organize, participate in or
engage in any business competitive with any product or service
marketed by the Corporation or any of its subsidiaries, or
conspire with others to do so, in the State of Minnesota or any
other state in which the Corporation or its subsidiaries are
located or have plans on the termination date to open a location.
Employee acknowledges that he shall be prevented from engaging in
the business as an individual, shareholder, owner, partner,
director, officer, employee, agent, or salesman for any person,
corporation, partnership or other entity and agrees that he will
not finance, facilitate, promote or encourage any person to
initiate or continue in the prohibited business for the period
provided.
(b) Nonsolicitation of Customers. Employee agrees he will not, during
a two-year period after termination of his employment hereunder,
except if such termination is pursuant to Article 6, attempt to
divert any business of the Corporation or its subsidiaries by
soliciting, contacting, or communicating with any customers of
the Corporation or its subsidiaries with whom Employee, or
employees under his supervision, had contacts during the year
preceding termination of his employment or any persons or
entities who might reasonably be considered within the class of
customers actively solicited by the Corporation or its
subsidiaries.
(c) Nonsolicitation of Employees. Employee agrees he will not, during
a two-year period after termination of his employment, except if
such termination is pursuant to Article 6, solicit any present or
future employee of the Corporation or its subsidiaries for any
purpose of hiring or attempting to hire such employee, nor will
Employee in any manner attempt to persuade or encourage any of
the employees of the Corporation or its subsidiaries to
discontinue their employment with the Corporation or its
subsidiaries.
<PAGE>
(d) Specific Performance and Injunctive Relief. Employee acknowledges
that the restrictions and covenants contained in this Article 5
are reasonable and necessary to protect the legitimate interests
of the Corporation. Employee understands and agrees that the
remedies at law for any violation of the restrictions or
covenants by this Article may be inadequate, that such violations
may cause irreparable injury within a short period of time and
that the Corporation shall be entitled to preliminary injunctive
relief and other injunctive relief against such violation without
the necessity of proving actual damages. Such injunctive relief
shall be in addition to and not in limitation of any and all
other remedies the Corporation shall have in law and at equity
for the enforcement of such restrictions and covenants. Nothing
herein provided shall be construed as prohibiting the Corporation
or Employee from pursuing any other remedies available in the
event of breach or threatened breach, including the recovery of
damages. And, in that regard, in the event that either the
Corporation or Employee shall violate any of the foregoing
provisions of this Article, the successful party shall have the
right to collect a reasonable attorney's fee for bringing such
legal or equitable action or otherwise enforcing the terms and
conditions of this Article.
(e) Confidential Information. Employee will not, during or after the
Term of this Agreement, directly or indirectly, disclose any of
the Corporation's confidential or proprietary information, trade
secrets or other information relating to the operation of the
business of the Corporation or its subsidiaries to any person,
firm, corporation, association, or other entity for any reason or
purpose whatsoever except the furtherance of the interests of the
Corporation or its subsidiaries, provided such information is,
through no fault of Employee, not otherwise in the public domain
or otherwise made known by the Corporation.
ARTICLE 6
CHANGE IN CONTROL
6.1) Change of Control Right. For a period of two (2) years following a
Change in Control, as defined in Section 6.6(b), Employee shall have the right,
at any time and within Employee's sole discretion, to terminate employment with
the Corporation for Good Reason, as defined in Section 6.6(d). Such termination
shall be accomplished by, and effective upon, Employee giving written notice to
the Corporation of Employee's decision to terminate. Except as otherwise
expressly provided in this Agreement, upon exercise of said right, all
obligations and duties of Employee under this Agreement shall be of no further
force and effect.
6.2) Change of Control Termination Payment. In the event of a Change in
Control Termination, as defined in Section 6.6(c), then, and without further
action by the Board of Directors, the Compensation Committee of the Board of
Directors, if any, or otherwise, the Corporation shall pay to Employee an amount
equal to Employee's cash compensation (including salary and bonuses paid,but
excluding cash or non-cash fringe benefits such as car allowances) for the two
fiscal years preceding such termination, which amount shall be paid by the
Company in 24 equal monthly installments beginning on the first day of the month
following the month in which such termination occurs with the remaining payments
made on the first day of each of the succeeding 23 months.
<PAGE>
6.3) Waiver of Non-Competition and Non-Recruitment Provisions.
Notwithstanding any other provision or language in this Agreement or any other
agreement or undertaking by Employee, in the event of a Change of Control
Termination, there shall be no prohibition or restriction with respect to
Employee's subsequent activities and Employee shall be free to pursue any
commercial activity, including any which is directly or indirectly competitive
with, or involves any recruitment with respect to, any part of the Corporation's
business, including but not limited to the Corporation's customers, vendors,
suppliers and employees.
6.4) Interest. In the event the Corporation does not make timely payment of
the Change of Control Termination amounts described in Section 6.2, Employee
shall be entitled to receive interest on any unpaid amount at the prime rate of
interest (or such comparable index as may be adopted) established from time to
time by the Norwest Bank Minnesota, N.A., Minneapolis, Minnesota.
6.5) Attorneys' Fees. In the event Employee incurs any legal expense to
enforce or defend his rights under Article 6 of this Agreement, or to recover
damages for breach thereof, Employee shall be entitled to recover from the
Corporation any reasonable expenses for attorneys' fees and disbursements
incurred.
6.6) Definitions. For purposes of this Article 6, the following definitions
shall be applied:
(a) "Continuing Directors" shall mean the directors of the
Corporation as of the date of execution of this Agreement and any
new director whose election to the Board of Directors or
nomination for election to the Board of Directors is approved by
a vote of at least two-thirds (2/3) of the directors as of the
date of execution of this Agreement who are then still in office.
(b) "Change of Control" shall mean any of the following events unless
approved in advance by a majority of the Continuing Directors:
(i) the acquisition of direct or indirect beneficial ownership
(as defined in Rule 13d-3 under the Securities Exchange Act
of 1934) in the aggregate of securities of the Corporation
representing twenty percent (20%) or more of the total
combined voting power of the Corporation's then issued and
outstanding securities by any person or entity, or group of
associated persons or entities acting in concert, except for
the officers and directors of the Company as of the date
this agreement is executed; or
(ii) a merger or consolidation to which the Corporation is a
party if the individuals and entities who were shareholders
of the Corporation immediately prior to the effective date
of such merger or consolidation have beneficial ownership
(as defined in Rule 13d-3 under the Securities Exchange Act
of 1934) of less than fifty percent (50%) of the total
combined voting power for election of directors of the
surviving corporation following the effective date of such
merger or consolidation; or
(iii) the sale of the properties and assets of the Corporation,
substantially as an entirety, to any person or entity which
is not a wholly-owned subsidiary of the Corporation; or
(iv) the consummation of a plan of complete liquidation of the
Corporation or of an agreement for the sale or disposition
by the Corporation of all or substantially all of the
Corporation's business or assets; or
(v) a change in the composition of the Corporation's Board of
Directors at any time after the execution of this Agreement
such that the Continuing Directors cease for any reason to
constitute at least a seventy percent (70%) majority of the
Board.
<PAGE>
(c) "Change of Control Termination" shall mean with respect to
Employee, any of the following events occurring within two (2)
years after a Change of Control:
(i) Termination of Employee's employment by the Corporation for
any reason, other than pursuant to Section 4.1(a) or (c),
except for conduct by Employee constituting a felony; or
(ii) Termination of employment with the Corporation by Employee
pursuant to Section 6.1. A Change of Control Termination by
Employee shall not include termination by reason of death.
(d) "Good Reason" shall mean a good faith determination by Employee,
in Employee's sole and absolute judgment, that one or more of the
following events has occurred, without Employee's express written
consent, after a Change of Control:
(i) A change in Employee's reporting responsibilities, titles or
offices as in effect immediately prior to the Change of
Control, or any removal of Employee from, or any failure to
re-elect Employee to, any of such positions, which has the
effect of diminishing Employee's responsibility or
authority;
(ii) A reduction by the Corporation in Employee's Base Salary or
Annual Bonus as in effect immediately prior to the Change of
Control or as the same may be increased from time to time;
(iii) The Corporation requiring Employee to be based anywhere
other than within twenty-five (25) miles of Employee's job
location at the time of the Change of Control;
(iv) Without replacement by a plan, program, or arrangement
providing benefits to Employee of the Corporation and its
subsidiaries equal to or greater than those discontinued or
adversely affected, the failure by the Corporation to
continue in effect, within its maximum stated term, any
pension, bonus, incentive, stock ownership, purchase,
option, life insurance, health, accident, disability, or any
other employee compensation or benefit plan, program or
arrangement, in which Employee is participating immediately
prior to a Change of Control or the taking of any action by
the Corporation that would adversely affect Employee's
participation or materially reduce Employee's benefits under
any of such plans, programs or arrangements;
<PAGE>
(v) The taking of any action by the Corporation that would
materially or adversely affect the physical conditions
existing at the time of the Change of Control in or under
which Employee performs his employment duties;
(vi) The taking of any action by the Corporation that would
materially change the Corporation's business strategies or
practices existing at the time of the Change of Control,
including but not limited to changes in the types and brands
of products offered, advertising and promotion programs,
employment policies, and the segment to which the
Corporation markets its products; or
(vii) Termination of employment by the Corporation of any of the
officers or administrative support staff of the Corporation
or any of its subsidiaries who held such positions at the
time of the Change of Control.
ARTICLE 7
MISCELLANEOUS
7.1) Severability. If any term or provision of this Agreement shall be held
to be invalid or unenforceable for any reason, such term or provision shall be
ineffective to the extent of such invalidity or unenforceability without
invalidating the remaining terms or provisions of this Agreement. Without in any
way limiting the generality of the foregoing, if any provision of Article 5
shall be determined by any court of competent jurisdiction to be unenforceable
by reason of its extending for too long a period of time or over too great a
geographical area, such provision shall be interpreted to extend over only the
maximum period of time during which it may be enforced and to apply only to the
maximum geographical area in which it may be enforced, as the case may be.
7.2) Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient, if given in person or if in writing, sent by
certified mail, return receipt requested, to the last known residence address in
the case of Employee or to its principal office in the case of the Corporation.
7.3) Waiver of Breach. The waiver by either party hereto of the breach of
any provision of this Agreement shall not operate or be construed as a waiver of
any subsequent breach by any party.
7.4) Entire Agreement. This Agreement contains the entire agreement of the
parties concerning the employment of Employee by the Corporation. This Agreement
may not be changed orally, but only by an agreement in writing signed by the
parties against whom enforcement of any waiver, change, modification, extension
or discharge is sought.
7.5) Governing Law. This Agreement shall be construed and interpreted
according to the laws of the State of Minnesota.
7.6) Headings. The captions set forth in this Agreement are for convenience
only and shall not be considered a part of this Agreement or in any way limiting
or amplifying the terms or provisions hereof.
<PAGE>
7.7) Obligations Which Survive Termination. The obligations and remedies of
Sections 4.2, 4.3, 6.2 and Article 5 of this Agreement shall survive the
execution and termination of this Agreement, except as expressly otherwise
provided for in this Agreement.
7.8) Assignment. The Corporation may assign its rights and delegate its
responsibilities under this Agreement to any person or entity which acquires all
or substantially all of the operating assets of the Corporation by merger,
consolidation, dissolution, liquidation, combination, sale or transfer of assets
or otherwise. Employee may not assign any of his rights or obligations under
this Agreement.
7.9) Counterparts. This Agreement may be executed simultaneously into two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
WINLAND ELECTRONICS, INC.
By /s/ W. Kirk Hankins
W. Kirk Hankins
President and Chief Executive Officer
/s/ Kirk P. Hankins
Kirk P. Hankins
CREDIT AGREEMENT
This Credit Agreement (the "Agreement") dated as of January 31, 1996 (the
"Effective Date") is between Norwest Bank Minnesota South, National Association
(the "Bank") and Winland Electronics, Incorporated (the "Borrower").
BACKGROUND
The Borrower has asked the Bank to extend to it a $2,000,000.00 conditional
revolving line of credit to be used for purposes of funding increases in
accounts receivable and inventory.
The Revolving Note, this Agreement, and all "Security Agreements" described in
Exhibit B may collectively be referred to as the "Documents."
In consideration of the above premises, the Borrower and the Bank agree as
follows:
1. LINE OF CREDIT
1.1 Line of Credit Amount. During the Line Availability Period defined
below, the Bank agrees to provide a conditional revolving line of
credit (the "Line") to the Borrower. Outstanding amounts under the Line
will not, at any one time, exceed the lesser of the Borrowing Base or
Two Million and 10/100 Dollars ($2,000,000.00). The Borrowing Base is
defined in Exhibit A-1 of this Agreement. This is a conditional
revolving line of credit and each advance under the Line, if made, will
be at the sole discretion of the Bank.
1.2 Line Availability Period. The "Line Availability Period" will mean the
period of time from the Effective Date or the date on which all
conditions precedent described in this Agreement have been met,
whichever is later, to May 31, 1997 (the "Line Expiration Date").
1.3 Advances. The Borrower's obligation to repay advances made under the
Line will be evidenced by a single promissory note (the "Revolving
Note") dated as of the Effective Date and in form and content
acceptable to the Bank. Reference is made to the Revolving Note for
interest rate and repayment terms.
1.4 Mandatory Prepayment. If at any time the principal outstanding under the
Revolving Note exceeds the lesser of the Borrowing Base or $2,000,000.00,
the Borrower must immediately prepay the Revolving Note to eliminate the
excess.
2. EXPENSES
2.1 Documentation Expenses. The Borrower agrees to pay the Bank's
reasonable expenses relating to the preparation of the Documents. The
Borrower also agrees to pay the Bank's expenses relating to any
amendments to the Documents that may be necessary in the future.
Expenses include, but are not limited to, reasonable attorneys' fees,
including the allocated costs of the Bank's in-house counsel.
<PAGE>
2.2 Collection Expenses. In the event the Borrower fails to pay the Bank
any amounts due under this Agreement or under the Documents, the
Borrower will pay all costs of collection, including reasonable
attorneys' fees and legal expenses incurred by the Bank.
2.3 Miscellaneous Expense. The Borrower agrees to reimburse the Bank for all
expenses paid to third parties relating to the perfection of its security
interest in collateral pledged to the Bank.
3. DISBURSEMENTS AND PAYMENTS
3.1 Requests for Advances. Any line advance permitted under this Agreement
must be requested by telephone or in a writing delivered to the Bank
(or transmitted via facsimile) by any person reasonably believed by the
Bank to be an authorized officer of the Borrower. The Bank will not
consider any such request if there is an event which is, or with notice
or the lapse of time would be, an event of default under this
Agreement. Proceeds will be deposited into the Borrower's account at
the Bank or disbursed in such other manner as the parties agree.
3.2 Payments. All principal, interest and fees due under the Documents will
be paid to the Bank by the direct debit of available funds on deposit
in the Borrower's account with the Bank. The Bank will debit the
account on the dates the payments become due. If a due date does not
fall on a day on which the Bank is open for substantially all of its
business (a "Banking Day"), the Bank will debit the account on the next
Banking Day and interest will continue to accrue during the extended
period. If there are insufficient funds in the account on the day the
Bank enters any debit authorized by this Agreement, the debit will be
reversed and the payment will be due immediately without necessity of
demand by direct remittance of immediately available funds.
4. SECURITY
All amounts due under this Agreement and the Documents will be secured
as provided in Exhibit B. The Borrower also hereby grants the Bank a
security interest (independent of the Bank's right of set-off) in its
deposit accounts at the Bank nd in any other debt obligations of the
Bank to the Borrower.
5. CONDITIONS PRECEDENT
The Borrower must deliver to the Bank the documents described in
Exhibit B, properly executed and inform and content acceptable to the
Bank, prior to the Bank's initial advance or disbursement under this
Agreement. The Borrower must also deliver to the Bank any additional
documents described in Exhibit B as a condition precedent to subsequent
advances or disbursements under this Agreement.
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<PAGE>
6. REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Agreement, the Borrower, to the
best of its knowledge and upon due inquiry, makes the representations
and warranties contained in Exhibit C. Each request for an advance
under this Agreement constitutes a reaffirmation of these
representations and warranties.
7. COVENANTS
During the time period that credit is available under this Agreement,
and thereafter until all amounts due under the Documents are paid in
full, unless the Bank shall otherwise agree in writing, the Borrower
agrees to:
7.1 Financial Information
(a) Annual Financial Statements. Provide the Bank within 120 days of the
Borrower's fiscal year end, the Borrower's annual financial statements. The
statements must be audited with an unqualified opinion by a certified
public accountant acceptable to the Bank.
(b) Interim Financial Statements. Provide the Bank within 45 days of each month
end, the Borrower's interim financial statements certified as correct in
form acceptable to the Bank.
(c) Borrowing Base Certificate. Provide the Bank within 30 days of each month
end a Borrowing Base Certificate in the form of Exhibit A-2, certified as
correct by an officer of the Borrower.
(d) Accounts Receivable Aging. Provide the Bank within 45 days of each quarter
end, an accounts receivable aging report in form acceptable to the Bank and
certified as correct by an officer of the Borrower acceptable to the Bank.
(e) Notices of Default. Provide the Bank prompt written notice of: 1) any event
which has or might after the passage of time or the giving of notice, or
both, constitute an event of default under any of the Documents; 2) any
future event that would cause the representations and warranties contained
in this Agreement to be untrue when applied to the Borrower's circumstances
as of the date of such event; 3) its discovery of any unpermitted release,
emission, discharge or disposal of any material of environmental concern;
or 4) its receipt of a claim from any governmental entity or third party
alleging noncompliance with environmental laws applicable to its operations
or properties.
(f) Additional Information. Provide the Bank with such other information as it
may reasonably request, and permit the Bank to visit and inspect its
properties and examine its books and records.
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<PAGE>
7.2 Financial Covenants
(a) Tangible Net Worth. Maintain a positive Tangible Net Worth as of the end of
each fiscal year that is no less than the Borrower's Tangible Net Worth as
of fiscal year end 1995.
"Tangible Net Worth" means total assets less total liabilities and less
the following types of assets: (1) leasehold improvements; (2)
receivables and other investments in or amounts due from any
shareholder, director, officer, employee or other person or entity
related to or affiliated with the Borrower; (3) goodwill, patents,
copyrights, mailing lists, trade names, trademarks, servicing rights,
organizational and franchise costs, bond underwriting costs and other
like assets properly classified as intangible.
(b) Total Liabilities to Tangible Net Worth Ratio. Maintain a ratio of total
liabilities to Tangible Net Worth of less than 2.20 to 1.0 as of the end of
each fiscal year.
(c) Net Profit. Achieve a positive after-tax net profit as of each fiscal year
end.
(d) Current Ratio. Maintain a ratio of Current Assets to Current Liabilities of
at least 1.2 to 1.0 as of the end of each fiscal year.
"Current Assets" means current assets less receivables and investments
in or other amounts due from any shareholder, director, officer,
employee or any person or entity related to or affiliated with the
Borrower.
"Current Liabilities" means current liabilities less any portion of
such current liabilities that constitute Subordinated Debt.
(e) Debt Service Coverage Ratio. Maintain a ratio of Traditional Cash Flow
plus interest expense to Current Maturities of Long Term Debt plus
interest expense of at least 1.2 to 1.0 as of the end of each fiscal
year.
"Traditional Cash Flow" means the aggregate amount of the following:
(1) net income after taxes; (2) amortization expense; (3) depreciation
and depletion expense; (4) deferred tax expense and (5) similar
non-cash charges against income which the Bank determines in its
discretion to be appropriate "add-backs."
"Current Maturities of Long Term Debt" means that portion of the
Borrower's long term debt and capital leases payable within 12 months
of the determination date.
7.3 Other Covenants
(a) Additional Borrowing. Refrain from incurring any indebtedness except:
(i) Trade credit incurred in the ordinary course of business.
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<PAGE>
(ii) Indebtedness expressly subordinated to the Bank in a writing
acceptable to the Bank.
(iii) Indebtedness in existence on the date of this Agreement and
disclosed in advance to the Bank in writing.
(iv) Purchase money indebtedness (including capitalized leases) for
the acquisition of fixed assets, provided that the total principal
amount outstanding at any one time does not exceed $30,000.00.
(b) Other Liens. Refrain from allowing any security interest or lien on
property it owns now or in the future, except:
(i) Liens in favor of the Bank.
(ii) Liens for taxes not delinquent or which the Borrower is
contesting in good faith.
(iii) Liens outstanding on the date of this Agreement and disclosed in
advance to the Bank in writing.
(iv) Liens which secure purchase money indebtedness allowed under this
Agreement.
(c) Insurance. Cause its properties to be adequately insured by a reputable
insurance company against loss or damage and to carry such other
insurance (including business interruption, flood, or environmental
risk insurance) as is usually carried by persons engaged in the same or
similar business. Such insurance must, with respect to the Bank's
collateral security, include a lender's loss payable endorsement in
favor of and in form acceptable to the Bank.
(d) Nature of Business. Refrain from engaging in any line of business
materially different from that presently engaged in by the Borrower.
(e) Deposit Accounts. Maintain its principal deposit accounts with the Bank.
(f) Merger. Refrain from consolidating, merging, pooling, syndicating or
otherwise combining with any other entity.
(g) Maintenance of Properties. Make all repairs, renewals or replacements
necessary to keep its plant, properties and equipment in good working
condition.
(h) Books and Records. Maintain adequate books and records and refrain from
making any material changes in its accounting procedures whether for tax
purposes or otherwise.
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<PAGE>
(i) Compliance with Laws. Comply in all material respects with all laws
applicable to its business and the ownership of its property.
(j) Preservation of Rights. Maintain and preserve all rights, privileges,
charters and franchises it now has.
These covenants were negotiated by the Bank and Borrower based on
information provided to the Bank by the Borrower. A breach of a
covenant is an indication that the risk of the transaction has
increased. As consideration for any waiver or modification of these
covenants, the Bank may require: additional collateral, guaranties or
other credit support; higher fees or interest rates; and possible
modifications to the Documents and the monitoring of the Agreement. The
waiver or modification of any covenant that has been violated by the
Borrower will be made in the sole discretion of the Bank. These options
do not limit the Bank's right to exercise its rights under Section 8 of
this Agreement.
8. EVENTS OF DEFAULT AND REMEDIES
8.1 Default
The Line is a conditional line of credit and may be terminated by the
Bank at any time in its discretion. Without prejudice to the
conditional nature of the Line, upon the occurrence of any one or more
of the following events of default, or at any time afterward unless the
default has been cured, the Bank may declare the Line to be terminated
and in its discretion accelerate and declare the unpaid principal,
accrued interest and all other amounts payable under the Revolving Note
to be immediately due and payable:
(a) Default by the Borrower in the payment when due of any principal or
interest due under the Revolving Note and continuance for 10 days.
(b) Default by the Borrower in the observance or performance of any
covenant or agreement contained in this Agreement, and continuance for
more than 30 days.
(c) Default by the Borrower in the observance or performance of any
covenant or agreement contained in the Documents, or any of them,
excluding this Agreement, after giving effect to any applicable grace
period.
(d) Default by the Borrower in any agreement with the Bank or any other
lender that relates to indebtedness or contingent liabilities which
would allow the maturity of such indebtedness to be accelerated.
(e) Any representation or warranty made by the Borrower to the Bank is untrue
in any material respect.
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<PAGE>
(f) Any litigation or governmental proceeding against the Borrower seeking an
amount that would have a material adverse effect upon the Borrower and
which is not insured or subject to indemnity by a solvent third party
either 1) results in a judgment in an amount that would have a material
adverse effect upon the Borrower or 2) remains unresolved on the earlier of
the completion of discovery or on the 270th day following its commencement,
unless as of that date no judgment has been rendered and the contingent
liability arising as a result is classified as "remote" by the Borrower's
counsel as that term is defined in FASB 5, in a signed opinion addressed to
the Bank.
(g) A garnishment, levy or writ of attachment, or any local, state, or federal
notice of tax lien or levy is served upon the Bank for the attachment of
property of the Borrower in the Bank's possession or indebtedness owed to
the Borrower by the Bank.
(h) A material adverse change occurs in the Borrower's financial condition or
ability to repay its obligations to the Bank.
8.2 Immediate Default
If, with or without the Borrower consent, a custodian, trustee or
receiver is appointed for any of the Borrower's properties, or if a
petition is filed by or against the Borrower under the United States
Bankruptcy Code, then the Line shall immediately terminate and the
unpaid principal, accrued interest and all other amounts payable under
the Revolving Note and the Documents will become immediately due and
payable without notice or demand.
9. MISCELLANEOUS.
(a) 360 Day Year. All interest and fees due under this Agreement will be
calculated on the basis of actual days elapsed in a 360 day year.
(b) GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all calculations for compliance
with financial covenants will be made using generally accepted
accounting principles consistently applied ("GAAP").
(c) No Waiver; Cumulative Remedies. No failure or delay by the Bank in
exercising any rights under this Agreement shall be deemed a waiver of
those rights. The remedies provided for in the Agreement are cumulative and
not exclusive of any remedies provided by law.
(d) Amendments or Modifications. Any amendment or modification of this
Agreement must be in writing and signed by the Bank and Borrower. Any
waiver of any provision in this Agreement must be in writing and signed
by the Bank.
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<PAGE>
(e) Binding Effect; Assignment. This Agreement and the Documents are
binding on the successors and assigns of the Borrower and Bank. The
Borrower may not assign its rights under this Agreement and the
Documents without the Bank's prior written consent. The Bank may sell
participations in or assign this Agreement and the Documents and
exchange financial information about the Borrower with actual or
potential participants or assignees.
(f) Minnesota Law. This Agreement and the Documents will be governed by the
substantive laws of the State of Minnesota.
(g) Severability of Provisions. If any part of this Agreement or the Documents
are unenforceable, the rest of this Agreement or the Documents may still be
enforced.
(h) Integration. This Agreement and the Documents describe the entire
understanding and agreement of the parties and supersedes all prior
agreements between the Bank and the Borrower relating to each credit
facility subject to this Agreement, whether verbal or in writing.
Address for notices to Bank: Address for notices to Borrower:
Norwest Bank Minnesota south, Winland Electronics, Incorporated
National Association 1950 Excel Drive
Second and Hickory Street Mankato, Minnesota 56001
Mankato, Minnesota 56002-0168
Attention: Michael L. King, Attention: W. Kirk Hankins, Sr.
Vice President President
Norwest Bank Minnesota South, Winland Electronics, Incorporated
National Association
By: /s/ Michael L. King By: /s/ W. Kirk Hankins
Michael L. King, Vice President W. Kirk Hankins, Sr., President
By:
Its:
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<PAGE>
EXHIBIT A-1
BORROWING BASE DEFINITION
"Borrowing Base" means the sum of 80% of Eligible Accounts Receivable (as
defined below) plus 60% of Eligible Inventory (as defined below).
Eligible Accounts Receivable means all accounts receivable except those which
are:
1) Greater than 90 days past the invoice date.
2) Due from an account debtor, 10% or more of whose accounts owed
to the Borrower are more than 90 days past the invoice date.
3) Subject to offset or dispute.
4) Due from an account debtor who is subject to any bankruptcy
proceeding.
5) Owed by a shareholder, subsidiary, affiliate, officer or
employee of the Borrower.
6) Not subject to a perfected first lien security interest in
favor of the Bank.
7) Due from an account debtor located outside the United States
and not supported by a standby letter of credit acceptable to
the Bank.
8) Due from a unit of government, whether foreign or domestic.
9) Otherwise deemed ineligible by the Bank in its reasonable
discretion.
Eligible Inventory means all inventory of the Borrower, at the lower of cost or
market as determined by generally accepted accounting principals, except
inventory which is:
1) In transit; or located at any warehouse not approved by the Bank.
2) Covered by a warehouse receipt, bill of lading or other document
of title.
3) On consignment to or from any other person or subject to any
bailment.
4) Damaged, obsolete or not salable in the Borrower's ordinary
course of business.
5) Subject to a perfected first lien security interest in favor of
any third party.
6) Supplies or parts inventory.
7) [Deleted]
8) Otherwise deemed ineligible by the Bank in its reasonable
discretion.
<PAGE>
EXHIBIT A-2
WINLAND ELECTRONICS, INCORPORATED
BORROWING BASE CERTIFICATE
To: Norwest Bank Minnesota South,
National Association
Second and Hickory Street
Mankato, Minnesota 56002-0168
(the "Bank")
Winland Electronics, Incorporated (the "Borrower") certifies that the following
computation of the Borrowing Base was performed as of __________________ in
accordance with the Borrowing Base definitions set forth in Exhibit A-1 to the
Credit Agreement between the Bank and the Borrower dated January 31, 1996.
Total Accounts Receivable $
Less: 1) Greater than 90 days in age $
2) Other ineligibles $
Eligible Accounts Receivable $
80% of Eligible Accounts Receivable $
Total Inventory $
Less: Ineligible Inventory $
Eligible Inventory $
60% of Eligible Inventory $
Total Borrowing Base $
Total Line Outstandings $
Excess (Deficit) $
WINLAND ELECTRONICS, INCORPORATED
By:
Its:
<PAGE>
EXHIBIT B
CONDITIONS PRECEDENT TO INITIAL ADVANCE AND SECURITY
Note
The Revolving Note
Security Documents
Security Agreement. A Security Agreement signed by the Borrower granting the
Bank a first lien security interest in the Borrower's accounts, inventory,
equipment and general intangibles. The Borrower will also execute financing
statements sufficient to perfect the security interest granted to the Bank.
Landlord's Waiver. A landlord's consent agreement for any personal property in
which the Bank has been granted a security interest that is located on real
property not owned by the --------------------------
Other
Arbitration Agreement. The Bank's standard form of Arbitration Agreement signed
by the Bank and Borrower, subjecting to binding arbitration potential
controversies between the Bank and Borrower relating to the Documents and the
Agreement, as more fully described in the Arbitration Agreement.
CONDITIONS PRECEDENT TO ALL ADVANCES
Borrowing Base Certificate. Concurrent with each request for credit under the
Line, the Borrower will deliver a Borrowing Base Certificate to the Bank in the
form of Exhibit A-2, unless the Bank is in possession of a Borrowing Base
Certificate current within 0 days of the requested advance.
<PAGE>
EXHIBIT C
REPRESENTATIONS AND WARRANTIES
Organizational Status. The Borrower is a corporation duly formed and in good
standing under the laws of the State of Minnesota.
Authorization. This Agreement, and the execution and delivery of the Documents
required hereunder, is within the Borrower's powers, has been duly authorized
and does not conflict with any of its organizational documents or any other
agreement by which the Borrower is bound, and has been signed by all persons
authorized and required to do so under its organizational documents.
Financial Reports. The Borrower has provided the Bank with its annual audited
financial statement dated December 31, 1994 and its unaudited interim financial
statement dated December 31, 1995, and these statements fairly represent the
financial condition of the Borrower as of their respective dates and were
prepared in accordance with GAAP.
Litigation. There is no litigation or governmental proceeding pending or
threatened against the Borrower which could have a material adverse effect on
the Borrower's financial condition or business.
Taxes. The Borrower has paid when due all federal, state and local taxes.
No Default. There is no event which is, or with notice or the lapse of time
would be, an event of default under this Agreement.
ERISA. The Borrower is in compliance in all material respects with ERISA and has
received no notice to the contrary from the PBGC or other governmental entity.
Environmental Matters. 1) The Borrower is in compliance in all material respects
with all health and environmental laws applicable to the Borrower and its
operations and knows of no conditions or circumstances that could interfere with
such compliance in the future; 2) the Borrower has obtained all environmental
permits and approvals required by law for the operation of its business; and 3)
the Borrower has not identified any "recognized environmental conditions", as
that term is defined by the American Society for Testing and Materials in its
standards for environmental due diligence, which could subject the Borrower to
enforcement action if brought to the attention of appropriate governmental
authorities.
REVOLVING NOTE
$2,000,000.00 January 31, 1996
FOR VALUE RECEIVED, Winland Electronics, Incorporated (the "Borrower") promises
to pay to the order of Norwest Bank Minnesota South, National Association (the
"Bank"), at its principal office or such other address as the Bank or holder may
designate from time to time, the principal sum of Two Million and 00/100 Dollars
($2,000,000.00), or the amount shown on the Bank's records to be outstanding,
plus interest (calculated on the basis of actual days elapsed in a 360-day year)
accruing on the unpaid balance at the annual interest rate defined below. Absent
manifest error, the Bank's records will be conclusive evidence of the principal
and accrued interest owing hereunder.
This Revolving Note is issued pursuant to a Credit Agreement of even date
between the Bank and the Borrower (the "Agreement"). The Agreement, and any
amendments or substitutions thereto, contain additional terms and conditions
including default and acceleration provisions. The terms of the Agreement are
incorporated into this Revolving Note by reference. Capitalized terms not
expressly defined herein shall have the meanings given them in the Agreement.
INTEREST RATE. The principal balance outstanding under this Revolving Note will
bear interest at an annual rate equal to the Base Rate plus 0.75%, floating.
"Base Rate" means the rate of interest established from time to time by Norwest
Bank Minnesota, National Association as its "base" or "prime" rate of interest
at its principal office in Minneapolis, Minnesota.
INTEREST AFTER MATURITY. The unpaid principal balance and interest due under
this Revolving Note after maturity (whether this Revolving Note matures by
demand, acceleration or lapse of time) shall bear interest until paid at the
Base Rate plus 0.75%, floating.
REPAYMENT TERMS
Interest. Interest will be payable on the first day of each month, beginning
March 1, 1996.
Principal. Principal, and any unpaid interest, will be payable in a single
payment due on May 31, 1997.
ADDITIONAL TERMS AND CONDITIONS. The Borrower agrees to pay all costs of
collection, including reasonable attorneys' fees and legal expenses incurred by
the Bank in the event this Revolving Note is not duly paid. Demand, presentment,
protest and notice of nonpayment and dishonor of this Revolving Note are
expressly waived. This Revolving Note will be governed by the substantive laws
of the State of Minnesota.
WINLAND ELECTRONICS, INCORPORATED
By: /s/ W. Kirk Hankins
Its: President
By:
Its
SECURITY AGREEMENT
Norwest Bank Minnesota South, Winland Electronics, Incorporated
National Association 1950 Excel Drive
Second and Hickory Street Mankato, Minnesota 56001
Mankato, Minnesota 56002-0168 (the "Borrower")
(the "Bank")
January 31, 1996
1. SECURITY INTEREST AND COLLATERAL. To secure payment of the Obligations (as
defined below), the Borrower hereby enters into this Security Agreement (the
"Agreement") and grants to the Bank a security interest (the "Security
Interest") in the Collateral (defined below).
"Obligations" means every present and future debt, liability, and obligation
which the Borrower may owe to the Bank, whether direct or indirect, due or
unmatured, absolute or contingent, primary or secondary, or joint, several or
joint and several, and including all extensions, renewals, amendments or
replacements of such debt, liability, or obligation.
"Collateral" means the following property, excluding consumer goods, in which
the Borrower now has or hereafter acquires an interest and all products and
proceeds of such property:
(a) "Inventory". All inventory held for sale or lease or supply under a service
contract, or which constitutes work in process or materials used or consumed in
the Borrower's business.
(b) "Equipment". All equipment including but not limited to all machinery,
vehicles, furniture, appliances, fixtures, manufacturing and processing
equipment, shop equipment, office and recordkeeping equipment, computer hardware
and software, and parts and tools.
(c) "Accounts and other Rights to Payment". Each and every right of the Debtor
to the payment of money, whether such right to payment exists now or arises in
the future, whether the right to payment arises out of a sale, lease, or other
disposition of goods or other property by the Debtor, out of a rendering of
services by or loan from the Debtor, out of the overpayment of taxes or other
liabilities of the Debtor, or otherwise arises under any contract or agreement,
whether or not such right to payment is or is not already earned by performance,
and howsoever such right to payment may be evidenced, together with all other
rights and interests (including all liens and security interests) which the
Debtor may at any time have by law or agreement against any account debtor or
other obligor or against any of the property of such account debtor or other
obligor. Such right to payment shall include but not be limited to all present
and future debt instruments, chattel papers, accounts, contract rights, loans
and other obligations receivable, unearned insurance premiums, rebates, and
negotiable documents.
(d) "General Intangibles". All general intangibles including but not limited to
applications for patents, patents, copyrights, trademarks, trade secrets,
goodwill, trade names, customer lists, permits, franchises, contracts, and the
right to use the Borrower's name.
<PAGE>
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Borrower represents, warrants and
agrees that:
(a) Borrower is a corporation whose chief executive office is located at the
address shown at the beginning of this Agreement, and that this Agreement has
been authorized by all necessary corporate action. If any part or all of the
tangible Collateral will become so related to particular real estate as to
become a fixture, the real estate concerned is: 1950 Excel Drive, Mankato,
Minnesota, and the name of the record owner is: Winland Electronics, Inc.
.
(b) The Collateral will be primarily used for business purposes.
(c) Borrower has and will have title to each item of Collateral free and clear
of all security interests and other encumbrances, except:
(i) the Security Interest;
(ii) liens for taxes not delinquent or which the Borrower is
contesting in good faith;
(iii) liens securing purchase money indebtedness to the extent
consented to in writing in advance by the Bank;
The Borrower will defend the Collateral against the claims of all persons except
the Bank. Borrower will not dispose of any interest in the Collateral without
the prior written consent of the Bank, except that, prior to the occurrence of
an Event of Default and the revocation by the Bank of the Borrower's right to do
so, Borrower may sell inventory in the ordinary course of business.
(d) Borrower will execute and deliver to the Bank financing statements and any
other documents that the Bank may require to perfect its Security Interest in
the Collateral, and will not permit any tangible Collateral to be located in any
state and/or county in which a financing statement perfecting such Collateral is
required to be but has not been filed. Borrower agrees that the Bank may
alternatively execute financing statements to perfect the Security Interest in
the Collateral where permitted by law.
(e) Each Account and each document is (or will be when arising or issued) the
valid and legally enforceable obligation, subject to no defense, set-off or
counterclaim (other than those arising in the ordinary course of business) of
the obligor shown by the Borrower's records to be obligated to pay such Account.
Borrower will not agree to the material modification or cancellation of any such
right to payment without the Bank's prior written consent, and will not
subordinate any such Account or right to payment to any other claim.
(f) Borrower will at all times:
(i) keep all tangible Collateral in good working order and condition,
normal depreciation excepted;
(ii) promptly pay all taxes and other governmental charges levied or
assessed upon Collateral;
<PAGE>
(iii) permit the Bank to examine or inspect any Collateral, wherever
located, and to examine, inspect and copy Borrower's books and records
pertaining to the Collateral and Borrower's business, and to request
verifications from account obligors of amounts owed to Borrower;
(iv) keep accurate and complete records regarding the Collateral and
Borrower's business and financial condition and provide the Bank such
periodic reports of condition as the Bank may reasonably request;
(v) promptly notify the Bank of any loss of or material damage to any
Collateral or of any adverse change known to Borrower regarding the
prospect of payment on any Account;
(vi) upon Bank's request, promptly deliver to the Bank any instrument,
document or chattel paper constituting Collateral, duly endorsed or
assigned by Borrower;
(vii) keep all tangible Collateral insured against loss and damage,
including risks of fire (including extended coverage), theft, collision (in
case of Collateral consisting of motor vehicles) and such other risks in
such amounts as the Bank may reasonably request, with any loss payable to
the Bank to the extent of its interest and with the commitment of the
insurer to notify the Bank before cancellation;
(viii) pay when due or reimburse the Bank on demand for all costs of
collection of the Obligations and all other out-of-pocket expenses
(including in each case all reasonable attorney's fees) incurred by the
Bank in connection with this Agreement and the Obligations, including
expenses incurred in any litigation or bankruptcy proceedings;
(ix) prevent the Collateral from being used or kept in violation of all
applicable law;
(x) obtain a waiver or consent from the owner and any mortgagee of any real
property where the Collateral may be located that provides that the
Security Interest will at all times be senior to any such interest or lien.
(g) If Borrower breaches any covenant or warranty in this Agreement, and the
breach or failure continues for a period of ten calendar days after the Bank
gives written notice (or, in the case of the agreement contained in clause (vii)
of Section 2(f), immediately upon the occurrence of such failure, without notice
or lapse of time), the Bank may in its discretion perform or observe such
agreements in the Borrower's or the Bank's name, and may take any other actions
which the Bank deems necessary to cure or correct such failure. Borrower shall
reimburse the Bank on demand for all costs and expenses (including reasonable
attorneys' fees) incurred by the Bank in performing or observing such
agreements. If the Borrower fails to reimburse the Bank upon demand, the Bank
may cause such amounts to be advanced or added to any of the Obligations secured
hereunder, which will bear interest at the highest rate provided under the note
designated for this purpose by the Bank at the time of the advance.
<PAGE>
(h) Borrower irrevocably appoints the Bank or its delegate as attorney-in-fact
of Borrower with the right (but not the duty) to execute, deliver, endorse or
file, in the name and on behalf of Borrower, any instruments, documents,
financing statements, applications for insurance or other agreements required of
Borrower under Section 2 at any time following an Event of Default. Following an
Event of Default, the Bank may in its discretion enforce any rights of the
Borrower under any contract of insurance, and in the Borrower's or the Bank's
name, execute and deliver proofs of claim, receive payment of proceeds, endorse
checks and other instruments representing payment of such proceeds, and adjust,
litigate, compromise or release any claim against the issuer of any such policy.
3. EVENTS OF DEFAULT. Each of the following occurrences shall constitute an
event of default under this Agreement (each an "Event of Default"):
(a) Borrower defaults under the terms of any of the Obligations or any credit
agreement relating thereto; or
(b) Borrower materially fails to observe or perform any covenant contained in
this Agreement; or
(c) any representation or warranty made by the Borrower and set forth in this
Agreement is materially false or misleading.
4. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event of Default
and at any time thereafter, the Bank may exercise any one or more of the
following rights and remedies:
(a) declare all unmatured Obligations to be immediately due and payable, without
presentment or other notice or demand;
(b) exercise all rights available upon default to a secured party under the
Uniform Commercial Code. The Bank may require Borrower to make the Collateral
available to the Bank at a place to be designated by the Bank which is
reasonably convenient to both parties, and if notice to Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given in the manner specified in this Agreement at least 10 calendar days prior
to the date of any public sale or disposition or the date after which any
private sale may occur;
(c) exercise any or all other rights available to the Bank by law or agreement
against the Collateral, the Borrower or any other person or property.
The Bank shall not be obligated to preserve an rights Borrower may have against
prior parties, to liquidate or realize on the Collateral at all or in any
particular manner or order, or apply any cash proceeds of Collateral in any
particular order.
5. OTHER PERSONAL PROPERTY. Unless at the time the Bank takes possession of any
tangible Collateral, or at any time within seven days thereafter, the Borrower
gives the Bank written notice of the existence of property belonging to the
Borrower that does not constitute Collateral, but which is located or found upon
or within such Collateral, together with a description of such property, the
Bank shall not be responsible or liable to the Borrower with respect to such
property unless it has actual knowledge of its existence and location upon or in
such Collateral.
<PAGE>
6. LOCK BOX, COLLATERAL ACCOUNT. Upon the Bank's request following an Event of
Default, the Borrower will direct each obligor on an account to make payments to
a special lock box under the control of the Bank. Borrower authorizes and
directs the Bank to deposit into a special collateral account to be established
and maintained with the Bank all checks, drafts and cash payments, received in
said lock box. All deposits to this collateral account shall constitute
Collateral and shall not constitute payment of any Obligation. At its option,
The bank may, at any time, apply collected funds on deposit in the collateral
account to the payment of the Obligations in such order of application as the
Bank may determine, or permit the Borrower to withdraw all or part of the
balance of the collateral account. If a collateral account is established,
Borrower agrees that it will promptly deliver to the Bank for deposit into the
collateral account all payments on Accounts. All such payments shall be
delivered to the Bank in the form received (except for Borrower's endorsement
where necessary). Until deposited, all payments on Accounts received by Borrower
shall be held in trust by the Borrower as the property of the Bank, and shall
not be commingled with any funds or property of the Borrower.
7. COLLECTION RIGHTS OF THE BANK. In addition to its rights under Sections 4 and
6, the Bank may, at any time following an Event of Default, notify any account
obligor or any other person obligated to pay any amount due with respect to an
Account to make payment directly to the Bank. Upon the Bank's request, Borrower
will notify such account obligors and other obligors in writing and will state
on all invoices to such account obligors or other obligors that the amount due
is payable directly to the Bank. At any time after the Bank or Borrower gives
such notice to an account obligor or other obligor, the Bank may, in its
discretion, and its own name or in Borrower's name, demand, sue for, collect or
receive any money or property at any time payable or receivable on account of,
or securing, any such chattel paper, account, or other right to payment, or
grant any extension to, make any compromise settlement with or otherwise agree
to waive or change the obligations (including collateral obligations) of any
such account obligor or other obligor.
8. AMENDMENTS. This Agreement can be waived, amended or terminated and the
Security Interest released, only in an express writing signed by the Bank. A
waiver signed by the Bank shall be effective only in the specific instance and
for the specific purpose given.
9. NO WAIVER; CUMULATIVE REMEDIES. Delay or failure to act shall not preclude
the exercise or enforcement of any of the Bank's rights or remedies. All rights
of the Bank shall be cumulative and may be exercised singularly or concurrently,
at the Bank's option, and the exercise of any one such right or remedy shall
neither be a condition to nor bar the exercise or enforcement of any other.
10. NOTICES. All notices to be given to Borrower shall be deemed sufficiently
given if delivered or mailed to the Borrower at the above address or at the most
recent address shown on the Bank's records.
11. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of Borrower and the Bank and their respective heirs,
representatives, successors and assigns and shall take effect when signed by
Borrower and delivered to the Bank. A photographic or other reproduction of this
Agreement or of any financing statement signed by the Borrower shall have the
same force and effect as the original.
12. APPLICABLE LAW; SEVERABILITY. Except to the extent otherwise required by
law, this Agreement shall be governed by the laws of the state in which the
Bank's main office is located. If any provision or application of this Agreement
is unenforceable in any respect, such unenforceability shall not affect other
provisions of this Agreement.
13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties contained in this Agreement shall survive the execution, delivery and
performance of this Agreement and the creation and payment of the Obligations.
14. INTEGRATION. This Agreement represents the entire understanding of the Bank
and Borrower with respect to the Collateral and supersedes all prior oral or
written agreements between the parties relating to the Collateral.
IN WITNESS WHEREOF, this Agreement was executed the day and year first
above written.
WINLAND ELECTRONICS, INCORPORATED
By: /s/ W. Kirk Hankins
Title: President
By:
Title:
EXHIBIT 23.1
Consent of Independent Auditors
As independent auditors for Winland Electronics, Inc. (the "Company"), we hereby
consent to the incorporation of our report dated February 8, 1996 included in
this Form 10-KSB into the Company's previously filed Registration Statements on
Form S-3, No. 333-723, and on Form S-8, No. 33-46710, No. 33-81880 and No.
33-73328.
/s/ Ahern Montag & Vogler, Ltd.
AHERN MONTAG & VOGLER, LTD.
March 16, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
financial statements for the year ended 12/31/95 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U. S. Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 2,839
<SECURITIES> 0
<RECEIVABLES> 1,000,231
<ALLOWANCES> 5,000
<INVENTORY> 2,195,042
<CURRENT-ASSETS> 3,234,036
<PP&E> 2,884,759
<DEPRECIATION> 192,393
<TOTAL-ASSETS> 6,555,745
<CURRENT-LIABILITIES> 2,012,174
<BONDS> 0
0
0
<COMMON> 25,833
<OTHER-SE> 1,887,858
<TOTAL-LIABILITY-AND-EQUITY> 6,555,745
<SALES> 5,850,724
<TOTAL-REVENUES> 5,861,024
<CGS> 4,791,200
<TOTAL-COSTS> 4,791,200
<OTHER-EXPENSES> 1,219,731
<LOSS-PROVISION> 5,000
<INTEREST-EXPENSE> 248,212
<INCOME-PRETAX> (149,907)
<INCOME-TAX> 0
<INCOME-CONTINUING> (149,907)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (149,907)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
