SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998 Commission File No.: 0-18393
WINLAND ELECTRONICS, INC.
(Name of small business issuer in its charter)
Minnesota 41-0992135
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1950 Excel Drive, Mankato, Minnesota 56001
(Address of principal executive offices)
(507) 625-7231
(Issuer's telephone number)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Issuer was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes X No_______
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for fiscal year ended December 31, 1998: $3,920,360
The aggregate market value of the Common Stock held by non-affiliates as of
March 3, 1999 was approximately $6,561,127 based on the closing sale price of
the Issuer's Common Stock on such date.
There were 2,882,955 shares of Common Stock, $.01 par value, outstanding as of
March 3, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference pursuant to Rule 12b-23: Portions of the
Company's Proxy Statement for its 1999 Annual Meeting are incorporated by
reference into Items 9, 10 and 11 of Part III.
Transitional Small Business Disclosure Format (check one) Yes No X
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Winland Electronics, Inc. (the "Company") was incorporated as a Minnesota
corporation in October 1972. The Company positions itself as a full service
provider of custom electronic controls and assemblies. The design and
manufacturing of custom controls and assemblies for OEM customers provided over
89% of the Company's total revenue in 1998. The Company now provides controls
and assemblies to several OEM customers who market their products to a wide
variety of industries. The Company continues to maintain its presence in the
security and industrial markets with the sales of its own line of proprietary
products.
PRODUCTS
The Company operates in one business segment, designing, producing and
distributing products in two product categories defined as "Electronic Controls
and Assemblies for OEM Customers" and "Security/Industrial Products."
Electronic Controls and Assemblies for OEM Customers. The Company designs and
manufactures custom electronic controls and assemblies for several OEM
customers. The Company responds to OEM customer needs by providing a mix of
value added services that it believes go beyond traditional contract
manufacturing. The services provided include product design, value engineering,
manufacturing engineering, testing, out-of-warranty repair, shipping, and
warehousing. These services help to differentiate the Company from the
competition and help increase customer satisfaction, confidence, and loyalty. A
partial listing of the several current OEM customers includes companies such as
Select Comfort Corporation, Johnson Worldwide Associates, CIC Systems, Inc.,
Scotsman Industries, Inc., and PeopleNet Communications Corporation. The Company
has in place several firm purchase agreements with OEM customers which are
scheduled to be fulfilled in 1999. There is no assurance that the Company will
continue to be engaged by any of these customers. Sales to OEM customers
accounted for 89% and 85% of the Company's total sales during 1998 and 1997,
respectively.
Proprietary Security/Industrial Products. The Company is a supplier of simple
and sophisticated microprocessor and mechanically controlled sensors and alarms.
These products monitor and detect environmental changes, such as changes in
temperature or humidity, water leakage and power failures. The Company's "ALERT"
series of products may be hooked up to many burglar or fire alarm panels to
monitor and report unfavorable environmental conditions. Security/industrial
product sales accounted for 11% and 15% of the Company's total sales for 1998
and 1997, respectively.
<PAGE>
MARKETING AND DISTRIBUTION
The Company markets its design and manufacturing services to prospective OEM
customers primarily through in-house sales and marketing efforts, referrals from
existing customers and suppliers, and leads generated by outside manufacturers
representatives. One of the Company's key marketing objectives is to form
long-term business relationships with OEM customers by working to develop a
degree of technological interdependence between itself and the customer. With
this in mind, the Company has worked to profile and seek out new OEM customers
that need a more complete solution to their manufacturing needs. The Company
plans to achieve continued growth in OEM sales by staying focused on what it
does best, responding to customer needs with exceptional service, technical
expertise, and continuing to deliver quality cost effective controls and
assemblies to its OEM customers.
The Company markets its proprietary security/industrial products through dealers
and wholesalers, in-house direct marketing and sales efforts, instrumentation
catalogs, and national and regional trade expositions. Currently, the Company
sells these products through a distribution network of over 350 locations in the
United States, Canada, Mexico, and Europe.
SOURCE OF MATERIALS
Raw material components and some subassemblies are purchased from outside
vendors, and they are qualified through receiving inspection before being
incorporated into our products. Certain purchased components and subassemblies
are manufactured to design specifications furnished by the Company, while others
are standard off-the-shelf items. The Company utilizes multiple sources for the
off-the-shelf components, but generally maintains only one source for the items
manufactured to design specifications. Because the Company is in the process of
contacting its suppliers, a determination cannot be made at this time with
regard to their Y2K readiness. If any of the Company's suppliers are unable to
provide assurances or are not fully Y2K compliant, it may become necessary for
the Company to identify alternative sources for materials. If the Company were
to lose one or more of its major components suppliers, or would need to seek
alternative suppliers, some delay and possible additional costs may be incurred
while obtaining alternative sources.
In addition to manufacturing its own products, the Company has contracted with
companies in the United States and foreign countries to provide both finished
goods assemblies and component assemblies designed to the Company's
specifications. Although alternative sources for such items may be found, if the
Company were to lose one or more of these suppliers due to Y2K or other issues,
some delay and additional costs may be incurred while obtaining alternative
sources. In addition, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION" for Y2K disclosure.
PATENTS, TRADEMARKS AND LICENSES
The Company holds federal trademark registrations for marks used in the
Company's business as follows: WATERBUG(R), TEMP ALERT(R) and ENVIRONMENTAL
SECURITY(R).
<PAGE>
SEASONALITY AND WORKING CAPITAL
Due to the diversity of the Company's customer mix, seasonality is no longer a
contributing factor in the need for working capital in any one quarter or
season. Changes in the types of products produced for the OEM customers could
materially affect the seasonality of the Company's business in future periods.
SIGNIFICANT CUSTOMERS
The Company has worked to develop long-term relationships with its OEM customers
that are mutually beneficial. Due to the nature of this segment of the business,
there is a significant degree of dependence between these customers and the
Company. Net sales to customers whose individual revenues equaled or exceeded
10% of the Company's net sales revenues for the years ended December 31, 1998
and 1997 were $13,455,328 or 74% and $8,992,312 or 73%, respectively.
Select Comfort Corporation has been one of the Company's most significant
customers during both 1998 and 1997, with sales of 47% and 51% of the Company's
net sales, respectively. Select Comfort is a Plymouth, Minnesota based air-sleep
system manufacturer in the bedding industry. As of December 31, 1998, the
Company has more than $12 million of firm purchase agreements with Select
Comfort Corporation. At December 31, 1998, these agreements were approximately
30% completed. The design and manufacturing services provided to Johnson
Worldwide Associates accounted for 13% and 17% of the Company's net sales during
1998 and 1997, respectively. Johnson Worldwide Associates is a Racine, Wisconsin
based manufacturer of recreational products. The design and manufacture services
provided to PeopleNet Communication Corporation accounted for 14% and 3% of the
Company's net sales during 1998 and 1997, respectively. PeopleNet Communication
Corporation is a Chaska, Minnesota based manufacturer of the "Intouch System," a
locating and mobile communications system for the long-haul trucking industry.
In addition to the above mentioned contract with Select Comfort Corporation, the
Company has several manufacturing agreements with other OEM customers. The
Company has a $5.5 million manufacturing agreement with PeopleNet Communications
Corporation. At December 31, 1998, this agreement was approximately 30%
complete. The Company began production of the "Intouch System" in late 1997, and
was in full-scale production by mid to late 1998. The loss of any OEM customer
would likely have an adverse effect on the Company's short-term, and potentially
long-term, results.
COMPETITION
The Company's business includes the design and manufacturing of electronic
controls and assemblies for OEM customers and the development and marketing of
proprietary security/industrial products. Among the security/industrial
products, competition has increased in the last two years as additional
companies have introduced competing products. The Company believes, however,
that its products offer desirable features at competitive prices.
<PAGE>
The competition for the contract design and manufacturing services offered by
the Company has increased substantially, both domestically and internationally.
To enhance its ability to compete effectively, the Company has continued to
invest in the development of its work force and technically advanced capital
equipment. The Company has been working to position itself as a full service
solution to its contract design and manufacture customers.
RESEARCH AND DEVELOPMENT
Throughout 1998, the Company has continued to position itself as a full-service
solution to its OEM customers by offering varied design technologies, including
wireless communications, GPS (global positioning systems), and embedded software
design for control systems. The Company has a strong research and development
department that has the ability to service most of the customers' engineering
requirements, including complete new product design, value engineering, and
redesign of existing products. The Company has continued to expand its
engineering staff and equipment with advances in wireless communication design
and expansion of its software development and advanced test system design staff.
The Company spent $694,421 or 3.8% of net sales for research and development
expenses for the year ended December 31, 1998, compared to $471,357 or 3.8% of
net sales for 1997.
EFFECT ON ENVIRONMENTAL REGULATIONS
To the extent that the Company's management can determine, there are no federal,
state, or local provisions regulating the discharge of materials into the
environment or otherwise relating to the protection of the environment with
which compliance by the Company has had, or is expected to have, a material
effect upon the capital expenditures, earnings, or competitive position of the
Company.
FOREIGN OPERATIONS AND EXPORT SALES
In 1998, the Company derived over 3% of its revenues from sales outside the
United States, primarily derived from New Zealand. The Company had not received
any significant revenues from sales outside of the United States during 1997.
PERSONNEL
At December 31, 1998, the Company had 108 employees, 105 full-time and three
part-time. The Company also extensively uses temporary labor services for peak
production purposes. The Company is not subject to a collective bargaining
agreement, and it considers its relations with its employees to be good.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns its office and manufacturing facility located in Mankato,
Minnesota. The 53,000 square foot building consists of 10,500 square feet of
office space, 32,500 square feet of manufacturing space and 10,000 square feet
of warehouse space, all of which is used by the Company. The funding of this
facility, site and site improvements was acquired through a $1,700,000 building
loan from the city of Mankato, a $500,000 state small cities loan, also payable
to the city of Mankato, and $270,000 from the city of Mankato in the form of tax
increment financing. The mortgage is payable in equal monthly installments of
approximately $16,200 for both loans until January 1, 2000, at which time it may
be necessary for the Company to renew the financing of the building. As of
December 31, 1998, the outstanding principle balance was $1,953,484. In late
1998, the Company made a decision to expand its facility by 5,000 square feet
and began construction of additional space in February 1999. The expansion will
provide additional needed office space to support future growth in many areas of
the organization. The Company plans to finance the expansion with a mortgage
loan from Norwest Bank, with the possibility of a portion of the financing to
come from the Minnesota Investments Fund. The expansion is scheduled to be
complete in late May 1999. Management believes that with the current expansion
the facility will adequately support the Company's present and near future
operations. Management believes its property is adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since May 26, 1995, the Company's Common Stock has traded on Nasdaq SmallCap
Market under the symbol WLET. The following table sets forth the high and the
low bid quotations, as reported by the Nasdaq SmallCap Market. The bid
quotations represent interdealer prices and do not include retail markets
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
Fiscal Year Ended
December 31, 1998 Low High
------------------- --- ----
First Quarter 2 1/4 2 7/8
Second Quarter 2 1/8 3 1/4
Third Quarter 1 5/8 3 1/32
Fourth Quarter 1 3/4 3 1/2
Fiscal Year Ended
December 31, 1997 Low High
------------------- --- ----
First Quarter 2 1/4 4 1/4
Second Quarter 2 1/2 3 1/2
Third Quarter 1 25/32 3 1/8
Fourth Quarter 2 3 1/8
On February 19, 1999, the fair market value of the Company's Common Stock was
$2.875, based on the closing sale price on that date. As of December 31, 1998,
the Company had approximately 509 shareholders of record.
The Company has never paid cash dividends on its Common Stock. The Board of
Directors presently intends to retain earnings for use in the Company's business
and does not anticipate paying cash dividends on Common Stock in the foreseeable
future. Any future determinations as to the payment of dividends will depend on
the financial condition of the Company and such other factors as are deemed
relevant by the Board of Directors.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations - 1998 vs. 1997
Net Sales. Net sales increased 46.8% to $18,175,509 for the year ended December
31, 1998, compared to $12,383,878 for 1997. The growth in net sales is primarily
attributed to increased sales to OEM customers during 1998 over 1997. In 1998
and 1997, sales to OEM customers represented 89% and 85%, respectively, of total
net sales. The Company currently has firm purchase agreements with Select
Comfort Corporation to ship approximately $8.4 million of product during 1999.
The Company also has firm purchase agreements with PeopleNet Communications
Corporation to ship approximately $3.8 million in product in 1999. In addition
to the above mentioned agreements, the Company has several smaller agreements
with various OEM customers to be fulfilled in 1999.
The Company has continued to position itself as a full service designer and
manufacturer of custom controls and assemblies for OEM customers. The loss of
any OEM customer would likely have an adverse effect on the Company's
short-term, and potentially long-term, results. The Company's marketing research
indicates that a large potential market exists for electronic design and
manufacturing services and that this market continues to grow rapidly.
Gross Profits. Gross profit was $3,920,360 or 21.6% of net sales for the year
ended December 31, 1998, compared to $2,729,315 or 22.0% of net sales for 1997.
As a percentage of net sales, gross profit remained relatively constant.
Operating Expenses. General and administrative expense was $1,449,376 or 8.0% of
net sales for the year ended December 31, 1998, compared to $1,043,788 or 8.4%
of net sales for 1997. The decline as a percentage of net sales in such expenses
is primarily attributed to administrative efficiencies the Company realized. The
actual general and administrative expense increased $405,588 for 1998 over 1997
due to the administrative support needed for the increased sales.
Marketing and customer relations expense was $297,964 or 1.6% of net sales for
the year ended December 31, 1998, compared to $245,708 or 2.0% of net sales for
1997. The increase in marketing and customer relations expense as compared to
1997, arose in part to the Company's efforts to secure new, long-term OEM
customer relationships to design and manufacture custom controls and assemblies.
The actual marketing expense increased $52,256 for 1998 over 1997. In late 1998,
to enable the Company to continue to offer exceptional service to its OEM and
security/industrial customers, the marketing and customer relations department
expanded its support personnel.
Research and development expense was $694,421 or 3.8% of net sales for the year
ended December 31, 1998, compared to $471,357 or 3.8% of net sales for 1997.
Although as a percentage of net sales the research and development expense
remained constant for 1998 compared to 1997, the actual research and development
expense increased $223,064 in 1998 over 1997. The increased research and
development expense was needed to support the Company's efforts to expand its
engineering capabilities with the addition of technical staff and the
acquisition of additional test and development equipment, which resulted in
increased depreciation expense being recognized.
Interest Expense. Interest expense was $534,127 or 2.9% of net sales for the
year ended December 31, 1998, compared to $445,158 or 3.6% of net sales for
1997. The increase in actual interest expense is primarily associated with
<PAGE>
additional short-term borrowing and borrowing through capital lease agreements
on equipment needed to support the increased sales. The Company believes the
additions of capital equipment will likely positively affect quality and
efficiencies in current and future periods.
Net Income. The Company reported net income of $855,595 or $0.29 per diluted
share for the year ended December 31, 1998, compared to net income of $566,687
or $0.20 per diluted share for 1997. In 1998, the Company used its remaining net
operating loss and tax credit carry forwards and as a result has incurred a
substantial income tax expense for 1998, compared to 1997. Even with the
increased income tax expense, the net income for 1998 increased 51% over 1997.
The Company's increased profitability resulted primarily from increased sales,
and increased efficiencies, combined with careful budgeting and cost control.
The Company believes inflation has not significantly affected its results of
operations.
Results of Operations - 1997 vs. 1996
Net Sales. Net sales increased 48.1% to $12,383,878 for the year ended December
31, 1997, compared to $8,361,226 for 1996. The growth in net sales is primarily
attributed to sales to Select Comfort Corporation during 1997. The Company also
had significant purchase agreements with PeopleNet Communications Corporation,
Keyless Door Lock Company and CIC Systems (NZ), Inc.
Gross Profits. Gross profit was $2,729,315 or 22.0% of net sales for the year
ended December 31, 1997, compared to $1,929,040, or 23.1% of net sales, for
1996. The slight decrease in gross profit, as a percentage of net sales, for
1997 over 1996, is primarily related to the sales mix during the year.
Operating Expenses. General and administrative expense was $1,043,788, or 8.4%
of net sales, for the year ended December 31, 1997, compared to $815,206, or
9.7% of net sales, for 1996. The decline in general and administrative expense
as a percentage of sales for 1997 compared to 1996 was primarily attributed to
general and administrative expenses increasing at a slower rate than the sales.
The actual expense increase, however, resulted from the demand of supporting
higher sales.
Marketing and customer relations expense was $245,708, or 2.0% of net sales, for
the year ended December 31, 1997, compared to $196,147 or 2.3% of net sales for
1996. While the Company continues to actively market its security/industrial
products, it has shifted to emphasize the Company's design and manufacture of
custom controls and assemblies, which produced the overall increase in marketing
and customer relations expense. These custom controls and assemblies are sold
primarily to the Company's OEM customers.
Research and development expense was $471,357, or 3.8% of net sales, for the
year ended December 31, 1997, compared to $322,488, or 3.9% of net sales, for
1996. The Company has continued to expand its engineering capabilities
<PAGE>
throughout 1997, with the addition of technical staff and the acquisition of
additional test and development equipment. Such expansion accounts for the
overall increase in research and development expense.
Interest Expense. Interest expense, including interest on the Company's
revolving line of credit, other long and short-term notes and interest on
capital lease obligations, equaled $445,158, or 3.6% of net sales, for the year
ended December 31, 1997, compared to $341,693, or 4.1% of net sales, for 1996.
As a percentage of net sales interest expense declined for 1997 compared 1996
due primarily to increased sales. The actual expense increases are primarily
associated with additional short-term borrowing and borrowing through capital
lease agreements on equipment needed to support the increase sales. The
additions of capital equipment should have a positive effect on quality and
efficiencies in subsequent periods.
Net Income. The Company reported net income of $566,687, or $0.20 per diluted
share, for 1997, compared to net income of $264,147, or $0.10 per diluted share,
for 1996. The Company's increased profitability was the result of increased
sales, combined with careful budgeting and cost control.
Liquidity and Capital Resources
The current ratio on December 31, 1998 was 1.60 to 1, compared to 1.49 to 1 on
December 31, 1997. Working capital equaled $2,448,966 on December 31, 1998,
compared to $1,786,593 on December 31, 1997. The increase in working capital
primarily reflects increases in accounts receivable due to increased sales,
offset by increases in income taxes payable. The Company used its remaining net
operating loss and tax credit carry forwards and has begun to incur income tax
expense in 1998.
The Company has a revolving credit agreement with the Norwest Bank Minnesota
South N.A. ("Norwest"), with a maximum loan limit of $3,500,000, subject to
additional limitations set forth in the credit agreement. The interest rate is
calculated at prime rate. At December 31, 1998, an outstanding balance of
$1,629,227 existed under the line of credit. The agreement expires on June 30,
1999, at which time the Company anticipates that it will renew its working
capital line of credit on terms similar to its existing line. The Company's
management believes that the capital available through the current credit
agreement, together with cash flows from operations, will be sufficient to meet
the Company's capital needs at least through 1999.
The Company is currently indebted to the City of Mankato for a $1,700,000
building loan and a $500,000 state small cities loan, both of which are secured
by a mortgage on the Company facility. These loans are payable in equal monthly
installment payments of approximately $16,200 until January 1, 2000, at which
time it will be necessary for the Company to renew the financing of the
building.
<PAGE>
Year 2000
Year 2000 Background
The Company's overall goal is to be Year 2000 ready. To accomplish this goal,
the Company is addressing the issue with respect to both its information
technology (IT) and non-IT systems, as well as its business relationships with
key third parties. To be ready, the Company needs to evaluate the Year 2000
issues and fix any problems it can so that all of its systems and relationships
will be suitable for continued use into and beyond the Year 2000.
The Company began addressing the Year 2000 issue in 1996 using a multi-step
approach, including inventory and assessment, remediation and testing, and
contingency planning. The Company began by assessing its internal computer
systems, including their components and machinery, that were susceptible to
system failure or processing errors as a result of the Y2K issue. This phase is
substantially complete. The Company's Year 2000 efforts have also included
assessment of "embedded" systems (such as automated systems and telephone
systems). In 1998, the Company hired an outside consultant to assist in the
assessment and remediation phases of handling the Year 2000 issue.
As part of the assessment phase, the Company has also recently initiated plans
for formal communications with certain key third parties, including suppliers,
distributors, and customers in order to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issues. The Company believes this part of the assessment phase will
continue throughout 1999 and cannot predict the outcome of other companies'
remediation efforts.
Year 2000 Costs
The Company plans to continue to work on its Year 2000 compliance efforts
throughout 1999. To date, the Company has spent only a minimal amount during the
assessment phase. Because the Company is still conducting the assessment phase
of its Year 2000 analysis, it cannot yet predict the total remaining cost of its
assessment, remediation and testing phases. As the Company continues its
analysis, it will monitor such costs. The cost will depend on the availability
of certain resources, third parties' Year 2000 readiness and other unpredictable
factors.
Risk Assessment
At this time, the Company believes that its most reasonably likely worst case
scenario is that the Company and/or its key customers could experience minor
disruptions. In the event that such disruptions do occur, the Company does not
expect that it would have a material adverse effect on the Company's financial
condition and results of operations. Due to the complex issues surrounding Year
2000 and other significant business issues, however, it is difficult to predict
outcomes and resulting consequences that could have a material adverse impact on
the company's results of operations, financial condition and cash flows.
<PAGE>
Contingency Plans
During 1999, the Company plans to prepare contingency plans if it determines
that certain Year 2000 issues cannot be resolved by December 1999. Such plans
will be designed so that the Company's critical business processes can be
expected to continue to function on January 1, 2000 and beyond. The Company's
contingency plans will be structured to address both remediation of systems and
their components and overall business operating risks. These plans are intended
to mitigate both internal risks as well as potential risks in the supply chain
of the Company's suppliers and customers.
Cautionary Statements: As provided for under the Private Securities Litigation
Reform Act of 1995, the Company wishes to caution investors that the following
important factors, among others, in some cases have affected and in the future
could affect the Company's actual results of operations and cause such results
to differ materially from those anticipated in forward-looking statements made
in this document and elsewhere by or on behalf of the Company.
The Company derives a significant portion of its revenues from a small number of
major OEM customers which are not subject to any long-term contracts with the
Company. If any major customer should for any reason stop doing business with
the Company, the Company's business would be significantly adversely affected.
Some of the Company's key customers are not large well-established companies,
and the business of each customer is subject to various risks such as market
acceptance of new products and continuing availability of financing. To the
extent that the Company's customers encounter difficulties, or the Company is
unable to meet the demands of its OEM customers, the Company could be adversely
affected.
The Company's ability to sustain continued increases in revenues and profits is
dependent upon its ability to retain existing customers and obtain new
customers. The Company competes for new customers with numerous independent
contract design and manufacturing firms in the United States and abroad, many of
whom have greater financial resources and a more established reputation. The
Company's ability to compete successfully in this industry depends, in part,
upon the price at which the Company is willing to manufacture a proposed product
and the quality of the Company's design and manufacturing services. There is no
assurance that the Company will be able to continue to win contracts from
existing and new customers on financially advantageous terms, and the failure to
do so could prevent the Company from achieving the growth it anticipates.
The operations and success of the Company depend, in part, upon the experience
and knowledge of W. Kirk Hankins, the Company's Chief Executive Officer and
Chief Financial Officer, and Lorin E. Krueger, the Company's President and Chief
Operating Officer. The loss of either Mr. Hankins or Mr. Krueger would have a
material adverse effect on the Company.
The impact of Year 2000 issues on the Company's business depends on the
accuracy, reliability and effectiveness of the Company's and its suppliers' and
customers' assessment and remediation of Year 2000 issues. There can be no
assurance that the Company's efforts will result in complete resolution of Year
2000 issues in order to prevent a material effect on its critical business
systems.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The financial statements immediately follow the signature page of this Form
10-KSB at the pages set forth below:
Page
Current independent Auditors Report dated January 29, 1999
for the year ended December 31, 1998.................................. F-1
Former Independent Auditors Report dated February 4, 1998
for the year ended December 31, 1997.................................. F-2
Balance Sheet as of December 31, 1998 and 1997........................ F-3
Statement of Income for Years Ended
December 31, 1998 and 1997............................................ F-4
Statement of Changes in Stockholders Equity for
Years Ended December 31, 1998 and 1997................................ F-5
Statement of Cash Flows for The Years Ended
December 31, 1998 and 1997............................................ F-6
Notes to Financial Statements......................................... F-7
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 1, 1998, Ahern Montag & Vogler, Ltd. resigned as the Company's
independent public accountants and McGladrey & Pullen, LLP was appointed as the
Company's independent accountants. There were no disagreements with Ahern Montag
& Vogler, Ltd. on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedures. The change in accountants
was reported in the Company's current Report on Form 8-K dated May 1, 1998.
<PAGE>
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 1999 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 1999 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 1999 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 1999 Annual Meeting of Shareholders
under the caption "Principal Shareholders and Management Shareholdings."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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 financial statements
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, 1998.
<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 18, 1999 /s/ W. Kirk Hankins
W. Kirk Hankins, Chief Executive Officer
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Company,
in the capacities, and on the dates, indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints W.
Kirk Hankins and Lorin E. Krueger as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report on Form 10-KSB and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
<PAGE>
Signature and Title Date
/s/ W. Kirk Hankins March 18, 1999
W. Kirk Hankins, Chief Executive Officer,
Chief Financial Officer and Director
(Principal Executive Officer and Principal Financial and
Accounting Officer)
/s/ Lorin E. Krueger March 18, 1999
Lorin E. Krueger, President, Chief Operating Officer
and Director
/s/ S. Robert Dessalet March 18, 1999
S. Robert Dessalet, Director
/s/ Kirk P. Hankins March 18, 1999
Kirk P. Hankins, Vice President of Marketing
and Director
/s/ Thomas J. de Petra March 18, 1999
Thomas J. de Petra, Director
/s/ David L. Ewert March 18, 1999
David L. Ewert, Director
/s/ Peter D. Jones March 18, 1999
Peter D. Jones, Director
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Winland Electronics, Inc.
Mankato, Minnesota
We have audited the accompanying balance sheet of Winland Electronics, Inc. as
of December 31, 1998, and the related statements of income, changes in
stockholders' equity, and cash flows for the year 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 audit. The financial statements of Winland Electronics, Inc. for the year
ended December 31, 1997, were audited by other auditors whose report, dated
February 4, 1998, expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides 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, 1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen LLP
Minneapolis, Minnesota
January 29, 1999
<PAGE>
AHERN MONTAG & VOGLER, LTD.
Certified Public Accountants
227 East Main Street, Suite 110
P.O. Box 3745
Mankato, Minnesota 56002-3745
Telephone: (507)625-8490 Fax: (507)625-5391
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Winland Electronics, Inc.
Mankato, Minnesota 56001
We have audited the accompanying balance sheet of Winland Electronics, Inc. as
of December 31, 1997 and 1996, and the related statements of income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Winland Electronics, Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ Ahern Montag & Vogler, Ltd.
AHERN MONTAG & VOGLER, LTD.
Certified Public Accountants
February 4, 1998
<PAGE>
WINLAND ELECTRONICS, INC.
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS (Note 3) 1998 1997
---------- ----------
<S> <C> <C>
Current Assets
Cash $ 20,656 $ 23,542
Accounts receivable, less allowance for doubtful accounts
1998 $155,000; 1997 $5,000 (Note 10) 2,482,507 1,581,368
Other receivables 47,454 --
Inventories (Note 2) 3,763,939 3,745,996
Prepaid expenses 62,882 116,660
Deferred taxes (Note 6) 124,000 --
---------- ----------
Total current assets 6,501,438 5,467,566
---------- ----------
Other Assets
Patents and trademarks, net of accumulated amortization
1998 $28,735; 1997 $27,206 5,505 7,034
Deferred taxes (Note 6) -- 17,741
---------- ----------
5,505 24,775
---------- ----------
Property and Equipment, at cost (Note 4)
Land and land improvements 270,009 270,009
Building 2,497,067 2,376,511
Machinery and equipment 3,001,256 2,628,804
Data processing equipment 842,352 522,859
Office furniture and equipment 267,472 227,303
---------- ----------
6,878,156 6,025,486
Less accumulated depreciation 1,754,500 1,168,707
---------- ----------
5,123,656 4,856,779
---------- ----------
$11,630,599 $10,349,120
========== ==========
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
---------- ----------
<S> <C> <C>
Current Liabilities
Note payable to bank (Note 3) $1,629,227 $1,733,227
Current maturities of long-term debt 573,183 494,606
Accounts payable 1,263,326 1,200,177
Accrued expenses:
Compensation 310,136 210,790
Other 47,757 37,759
Income taxes payable 228,843 4,414
---------- ----------
Total current liabilities 4,052,472 3,680,973
---------- ----------
Deferred Revenue (Note 5) 209,084 216,007
---------- ----------
Long-Term Debt, less current maturities (Notes 3 and 4) 3,429,975 3,543,461
---------- ----------
Deferred Taxes (Note 6) 111,000 --
---------- ----------
Commitments and Contingencies (Note 4)
Stockholders' Equity (Notes 7 and 9)
Common stock, par value $0.01 per share; 20,000,000 shares
authorized; issued and outstanding 1998 2,886,786 shares,
1997 2,808,039 shares 28,867 28,080
Additional paid-in capital 2,142,008 2,079,001
Retained earnings 1,657,193 801,598
---------- ----------
3,828,068 2,908,679
---------- ----------
$11,630,599 $10,349,120
========== ==========
</TABLE>
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENTS OF INCOME
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net sales (Note 10) $ 18,175,509 $ 12,382,878
Cost of sales 14,255,149 9,653,563
------------ ------------
Gross profit 3,920,360 2,729,315
------------ ------------
Operating expenses:
General and administrative 1,449,376 1,043,788
Research and development 694,421 471,357
Marketing 297,964 245,708
------------ ------------
2,441,761 1,760,853
------------ ------------
Operating income 1,478,599 968,462
------------ ------------
Other income (expenses):
Interest expense (534,127) (445,158)
Interest income 151,428 53,028
Other (305) 30,849
------------ ------------
(383,004) (361,281)
------------ ------------
Income before income taxes 1,095,595 607,181
Income taxes (Note 6) 240,000 40,494
------------ ------------
Net income $ 855,595 $ 566,687
============ ============
Earnings per share data:
Basic earnings per share $ 0.30 $ 0.20
Basic average common shares outstanding 2,837,466 2,796,458
Diluted earnings per share $ 0.29 $ 0.20
Diluted average common shares outstanding, including
potentially dilutive shares 2,935,058 2,875,977
</TABLE>
See Notes to Financial Statements.
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance on December 31, 1996 2,751,071 $ 27,511 $ 2,047,794 $ 234,911 $ 2,310,216
Issuance of common stock in accordance with
employee stock option and purchase plans
(Notes 7 and 9) 56,968 569 29,921 -- 30,490
Income tax benefit from exercise of nonqualified
stock options -- -- 1,286 -- 1,286
Net income -- -- -- 566,687 566,687
-------------------------------------------------------------------------------
Balance on December 31, 1997 2,808,039 28,080 2,079,001 801,598 2,908,679
Issuance of common stock in accordance with
employee stock option and purchase plans
(Notes 7 and 9) 78,747 787 63,007 -- 63,794
Net income -- -- -- 855,595 855,595
-------------------------------------------------------------------------------
Balance on December 31, 1998 2,886,786 $ 28,867 $ 2,142,008 $ 1,657,193 $ 3,828,068
===============================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 855,595 $ 566,687
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 647,435 438,414
Loss on disposal of equipment 28,644 110
Income tax benefit from exercise of nonqualified stock options -- 1,286
Deferred taxes 4,741 34,794
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (901,139) (253,982)
Other receivables (47,454) --
Inventories (17,943) (783,665)
Prepaid expenses 53,778 (45,681)
Increase in:
Accounts payable 63,149 516,771
Accrued expenses and other 102,421 24,460
Income taxes payable 224,429 4,078
-----------------------------------
Net cash provided by operating activities 1,013,656 503,272
-----------------------------------
Cash Flows From Investing Activities
Purchases of property and equipment (533,708) (262,625)
Proceeds from sale of equipment -- 11,665
-----------------------------------
Net cash used in investing activities (533,708) (250,960)
-----------------------------------
Cash Flows From Financing Activities
Net (payments) borrowings on revolving credit agreement (104,000) 153,000
Proceeds from long-term borrowings 115,000 --
Principal payments on long-term borrowings, including capital lease obligations (557,628) (431,759)
Proceeds from issuance of common stock 63,794 30,490
-----------------------------------
Net cash used in financing activities (482,834) (248,269)
-----------------------------------
Net increase (decrease) in cash (2,886) 4,043
Cash
Beginning of year 23,542 19,499
-----------------------------------
End of year $ 20,656 $ 23,542
===================================
</TABLE>
(Continued)
<PAGE>
WINLAND ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 535,293 $ 434,841
Income taxes 10,571 --
===================================
Supplemental Schedule of Noncash Investing and Financing Activities
Capital lease obligations incurred for the purchase of equipment $ 407,718 $ 1,193,159
===================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
Winland Electronics, Inc.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Significant Accounting Policies
Nature of business: The Company operates in one business segment which includes
the design and manufacture of electronic control devices. Sales are to customers
located primarily in the Upper Midwest, and credit is granted based upon the
credit policies of the Company.
A summary of the Company's significant accounting policies follows:
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from such estimates and
assumptions.
Cash: The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Patents and trademarks: Patents and trademarks are stated at cost and are being
amortized using the straight-line method over their economic useful lives.
Depreciation: It is the Company's policy to include depreciation expense on
assets acquired under capital leases with depreciation expense on owned assets.
Depreciation is computed using the straight-line method based on the estimated
useful lives of the various assets as follows:
Years
Land improvements 20
Building 39
Machinery and equipment 5-7
Data processing equipment 3-7
Office furniture and equipment 3-7
Long-lived assets: In accordance with Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of, the Company reviews its long-lived assets
and intangibles related to those assets periodically to determine potential
impairment by comparing the carrying value of the long-lived assets with the
estimated future cash flows expected to result from the use of the assets,
including cash flows from disposition. Should the sum of the expected future
cash flows be less than the carrying value, the Company would recognize an
impairment loss. An impairment loss would be measured by comparing the amount by
which the carrying value exceeds the fair value of the long-lived assets and
intangibles. To date, management has determined that no impairment of long-lived
assets exists.
<PAGE>
Note 1. Significant Accounting Policies (Continued)
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax basis.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Investment tax credits, research and development credits, and job credits are
accounted for by the flow-through method whereby they reduce income taxes
currently payable and the provision for income taxes in the period the assets
giving rise to the credits are placed in service. To the extent such credits are
not currently utilized on the Company's tax return, deferred tax assets, subject
to considerations about the need for a valuation allowance, are recognized for
the carryforward amount.
Fair value of financial instruments: In accordance with the requirements of
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures About
Fair Value of Financial Instruments, management estimates that the carrying
value of long-term debt approximates fair value due to the variable-interest
feature of the debt. The carrying value of all other financial instruments
approximates fair value due to the short-term nature of the instruments.
Earnings per share: The Company has adopted SFAS No. 128, Earnings Per Share,
which requires companies to present basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by dividing net
earnings by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share is computed by dividing net earnings by the
weighted-average number of common shares outstanding during the period,
including potentially dilutive shares under the treasury stock method.
Reclassification: Certain 1997 amounts have been reclassified to be in
conformity with the 1998 presentation.
During the year ended December 31, 1998, the Company changed its method of
presenting the statement of cash flows for operating activities from the direct
method (which showed principal components of operating cash receipts and
payments) to the indirect method (which adjusts net income to remove the effects
of noncash operating transactions). This change has been applied retroactively
to the 1997 statement of cash flows.
<PAGE>
Winland Electronics, Inc.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 2. Inventories
The components of inventory at December 31, 1998 and 1997, are as follows:
December 31
1998 1997
----------------------------------
Raw materials $ 2,676,738 $ 2,775,668
Work in progress 565,229 490,428
Finished goods 521,972 479,900
----------------------------------
Total $ 3,763,939 $ 3,745,996
==================================
Note 3. Financing Arrangement and Long-Term Debt
Financing arrangement: The Company has a $3,500,000 revolving line-of-credit
agreement through June 1999. Interest on advances is at the bank's reference
rate (7.75 percent at December 31, 1998) and is due monthly. Advances are due on
demand, are secured by substantially all assets of the Company, and are subject
to a defined borrowing base equal to 80 percent of qualified accounts receivable
and 60 percent of inventories. In addition, the agreement contains certain
reporting and operating covenants. Advances outstanding on the revolving
line-of-credit agreement at December 31, 1998 and 1997, were $1,629,227 and
$1,733,227, respectively.
Long-term debt: The following is a summary of long-term debt:
<TABLE>
<CAPTION>
December 31
1998 1997
------------------------------
<S> <C> <C>
6.941% note payable due in monthly installments of $13,117,
including interest, to January 1, 2000, when the remaining
balance is payable, secured by property and equipment $ 1,522,723 $ 1,572,542
4% note payable due in monthly installments of $3,030, including
interest, to January 1, 2000, when the remaining balance is
payable, secured by property and equipment 430,761 449,481
Note payable in monthly installments of $8,334, plus interest at prime
plus 0.75%, to October 2001, secured by accounts
receivable 283,316 383,324
8.75% note payable due in monthly installments of $1,400,
including interest, to July 2003, secured by equipment 167,660 --
Capitalized lease obligations, due in various monthly installments, with
interest ranging from 8.95% to 9.5%, to
October 2000, secured by equipment 130,584 230,714
Capitalized lease obligations, due in various monthly installments, with
interest ranging from 8.5% to 9.96%, to
August 2001, secured by equipment 342,219 333,793
</TABLE>
<PAGE>
Winland Electronics, Inc.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 3. Financing Arrangement and Long-Term Debt (Continued)
<TABLE>
<CAPTION>
December 31
1998 1997
------------------------------
<S> <C> <C>
Capitalized lease obligations, due in various monthly installments, with
interest ranging from 8.88% to 10.04%, to
October 2002, secured by equipment 342,389 394,685
Capitalized lease obligations, due in various monthly installments, with
interest ranging from 8.5% to 9.3%, to April
2003, secured by equipment 235,804 --
Capitalized lease obligation, due in monthly installments of $9,399, with
interest at 8.97%, to November 2004, secured by
equipment 547,702 607,456
Other -- 66,072
------------------------------
4,003,158 4,038,067
Less current maturities 573,183 494,606
------------------------------
Total long-term debt $ 3,429,975 $ 3,543,461
==============================
</TABLE>
Approximate maturities of long-term debt for years subsequent to December 31,
1998, are as follows:
1999 $ 573,000
2000 2,344,000
2001 420,000
2002 221,000
2003 297,000
Thereafter 148,000
-----------------
Total $ 4,003,000
=================
Note 4. Commitments and Contingencies
Capital leases: The Company is leasing certain equipment under capital leases.
The cost and accumulated depreciation of assets acquired under capital leases at
December 31, 1998 and 1997, are as follows:
1998 1997
-------------------------
Cost $ 2,522,665 $ 2,172,500
Accumulated amortization 756,053 457,000
-------------------------
Net leased property under capital leases $ 1,766,612 $ 1,715,500
=========================
<PAGE>
Winland Electronics, Inc.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 4. Commitments and Contingencies (Continued)
The future minimum lease payments under capital leases and the aggregate present
value of the net minimum lease payments at December 31, 1998, are as follow:
1999 $ 548,000
2000 438,000
2001 385,000
2002 241,000
2003 150,000
Thereafter 156,000
Total minimum lease payments 1,918,000
------------
Less amount representing interest 319,000
------------
$ 1,599,000
============
The capital lease obligations are included in long-term debt.
Operating leases: The Company leases certain equipment and vehicles under
noncancelable operating leases through 2002. The Company 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, 1998 and 1997, were approximately $113,000 and $100,000,
respectively.
Approximate minimum future annual lease payments under these leases as of
December 31, 1998, are as follows:
Years ending December 31:
1999 $ 63,000
2000 42,000
2001 21,000
----------------
$ 126,000
================
Note 5. Deferred Revenue
During 1994, the Company and the city of Mankato entered into a tax increment
financing agreement for the construction of the Company's operating facility. In
connection with this agreement the city donated land and land improvements with
a fair value of $270,009. The fair value of land and land improvements donated
was accounted for as deferred revenue and is being amortized over 39 years,
which is the life of the building.
<PAGE>
Winland Electronics, Inc.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 6. Income Taxes
Components of the provision for income taxes are as follows:
December 31
1998 1997
----------------------
Current taxes $ 235,000 $ 4,414
Deferred 5,000 34,794
Additional paid-in capital from benefit of
stock options exercised -- 1,286
----------------------
$ 240,000 $ 40,494
======================
During 1998 and 1997 the Company also received a tax benefit from the
carryforward of net operating losses and tax credits totaling approximately
$137,000 and $193,000, respectively.
The statutory income tax rate reconciliation to effective rate is as follows:
December 31
1998 1997
--------------------------
Statutory U.S. income tax rate 35% 35%
State taxes, net of federal tax benefit 2% 6%
Tax benefit of NOL and credit carryforwards (11%) (34%)
Research and development tax credit (3%) 0%
Other (1%) (1%)
--------------------------
Effective income tax rate 22% 6%
==========================
Net deferred taxes consist of the following components as of December 31, 1998
and 1997:
December 31
1998 1997
--------------------------
Deferred tax assets:
Loss carryforwards $ -- $ 38,154
Tax credit carryforwards -- 92,146
Inventory 43,000 46,061
Allowance for doubtful accounts 57,000 --
Other 24,000 24,355
------------------------
Total deferred tax assets 124,000 200,716
Less valuation allowance -- (148,181)
------------------------
Deferred tax assets 124,000 52,535
Deferred tax liabilities:
Property and equipment 111,000 34,794
========================
Net deferred tax assets $ 13,000 $ 17,741
========================
<PAGE>
Winland Electronics, Inc.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. Income Taxes (Continued)
The components giving rise to the net deferred tax asset described above have
been included in the accompanying balance sheets at December 31, 1998 and 1997,
as follows:
December 31
1998 1997
------------------------
Current assets $ 124,000 $ --
Noncurrent assets 17,741
Noncurrent liabilities 111,000 --
Note 7. Stock-Based Compensation Plans
Stock option plan: The Company has reserved 750,000 common shares for issuance
under qualified and nonqualified stock options for its key employees and
directors. Option prices are the market value of the stock at the time the
option was granted. Options become exercisable as determined at the date of
grant by a committee of the Board of Directors. Options expire over the term of
the options, generally five years after the date of grant unless an earlier
expiration date is set at the time of grant.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized for the stock option plan.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, the Company's earnings and earnings per share would have changed
to the pro forma amounts indicated below:
December 31
1998 1997
------------------------
Net income--as reported $ 855,595 $ 566,687
Net income--pro forma 750,147 484,950
Net income per share, basic--as reported 0.30 0.20
Net income per share, diluted--as reported 0.29 0.20
Net income per share, basic--pro forma 0.26 0.17
Net income per share, diluted--pro forma 0.25 0.17
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997:
December 31
1998 1997
-------------------------
Expected life of options 3 years 3.5 years
Expected dividend yield 0.0% 0.0%
Expected stock price volatility 65.2% 64.0%
Risk-free interest rate 5.7% 5.5%
<PAGE>
Winland Electronics, Inc.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Stock-Based Compensation Plans (Continued)
The pro forma effect on earnings in 1998 and 1997 is not representative of the
pro forma effect in future years because it does not take into consideration pro
forma compensation expense related to grants made prior to 1995.
Additional information relating to all outstanding options as of December 31,
1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of
year 345,000 $ 2.25 296,940 $ 1.80
Options exercised (69,400) 0.63 (45,940) 0.11
Options expired (17,600) 2.50 (6,000) 2.63
Options granted 112,000 2.11 100,000 2.71
-------------------------------------------------------------
Options outstanding, end of year 370,000 $ 1.89 345,000 $ 2.25
=============================================================
Weighted-average fair value of
options granted during the year $ 0.93 $ 1.44
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices of Shares Life (Years) Price of Shares Price
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.75 to $1.8125 11,000 0.5 $ 1.78 11,000 $ 1.78
$1.75 to $1.925 112,000 1.6 1.83 93,100 1.83
$1.75 to $1.925 13,000 2.7 1.87 8,500 1.84
$1.75 to $1.925 122,000 3.5 1.76 39,800 1.76
$1.75 to $2.563 40,000 4.5 1.95 22,000 2.12
$2.819 30,000 4.9 2.82 30,000 2.82
$1.75 42,000 5.8 1.75 --
-----------------------------------------------------------------------
370,000 2.8 $ 1.89 204,400 $ 1.99
=======================================================================
</TABLE>
At December 31, 1997, there were 169,150 options exercisable at a
weighted-average exercise price of $1.40.
The Company also has outstanding warrants to purchase 37,000 shares of common
stock. These warrants are exercisable at $2.20 per share through March 2000.
<PAGE>
Winland Electronics, Inc.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 8. Earnings Per Share
The following table reflects the calculation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Earnings per share--basic:
Income available for common shareholders $ 855,595 $ 566,687
===============================
Weighted-average shares outstanding 2,837,466 2,796,458
Earnings per share--basic $ 0.30 0.20
===============================
Earnings per share--diluted:
Income available to common shareholders $ 855,595 $ 566,687
===============================
Weighted-average shares outstanding 2,837,466 2,796,458
Dilutive impact of options outstanding 93,320 72,851
Dilutive impact of warrants outstanding 4,272 6,668
-------------------------------
Weighted-average shares and potential dilutive shares
outstanding 2,935,058 2,875,977
===============================
Earnings per share--diluted $ 0.29 $ 0.20
===============================
</TABLE>
Options to purchase 40,000 and 107,600 shares of common stock at December 31,
1998 and 1997, respectively, were not included in the computation of diluted
earnings per share because the option exercise prices were greater than the
average market price of common shares.
Note 9. Employee Benefit Plans
Pension plan: The Company has a qualified defined contribution 401(k) profit
sharing plan for its employees who meet certain age and service requirements.
Employees are allowed to contribute up to 15 percent of eligible compensation,
and the Company makes a contribution of one-third of the employees'
contributions, up to a maximum of 10 percent. The Company contributed
approximately $66,200 and $44,500 to the plan for the years ended December 31,
1998 and 1997, respectively. In addition, the Company may make additional
discretionary contributions to the plan to the extent authorized by the Board of
Directors. There were no discretionary contributions to the plan for the years
ended December 31, 1998 and 1997.
<PAGE>
Winland Electronics, Inc.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 9. Employee Benefit Plans (Continued)
Stock purchase plan: The Company has adopted an employee stock purchase plan to
provide substantially all employees an opportunity to purchase shares of its
common stock through payroll deductions, up to 15 percent of eligible
compensation. The plan is carried out in two annual six-month phases beginning
January 1 and July 1, the grant dates. On June 30 and December 31, the exercise
dates, participant account balances are used to purchase shares of stock at the
lesser of 85 percent of the fair value of shares on the grant date or the
exercise date. The employee stock purchase plan expires December 31, 2002. A
total of 100,000 shares were originally available for purchase under the plan.
There were 9,347 and 11,028 shares purchased under the plan for the years ended
December 31, 1998 and 1997, respectively.
Note 10. Major Customers
The Company has customers which accounted for more than 10 percent of net sales
for the years ended December 31, 1998 and 1997, as follows:
1998 1997
----------------------------------
Sales percentage:
Customer A 47% 53%
Customer B 14% 3%
Customer C 13% 17%
Accounts receivable percentage at December 31:
Customer A 30% 37%
Customer B 34% 11%
Customer C 10% 20%
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-KSB
For the fiscal year ended Commission File No. 0-18393
December 31, 1998
--------------------------
WINLAND ELECTRONICS, INC.
--------------------------
Exhibit
Number Item
3.1 Restated Articles of Incorporation, as amended (Incorporated by
reference to Exhibit 3.1 to Form 10-KSB for the fiscal year ended
December 31, 1994)
3.2 Restated Bylaws (Incorporated by reference to Exhibit 3.2 to
Registration Statement on Form S-4, SEC File No. 33-31246)
4.1 Specimen of Common Stock certificate (Incorporated by reference to
Exhibit 4 to Registration Statement on Form S-4, SEC File No. 33-31246)
10.1 Winland Electronics, Inc. 1989 Stock Option Plan (Incorporated by
reference to Exhibit 10.6 to Registration Statement on Form S-4, SEC
File No. 33-31246)**
10.2 Amendment to Winland Electronics, Inc. 1989 Stock Option Plan
(Incorporated by reference to Exhibit 10.4 to Form 10-KSB for the
fiscal year ended December 31, 1993)**
10.3 Form of Incentive Stock Option Agreement for use under the 1989 Stock
Option Plan (Incorporated by reference to Exhibit 10.7 to Registration
Statement on Form S-4, SEC File No. 33-31246)**
10.4 Amendment to Winland Electronics, Inc. 1989 Stock Option Plan dated
December 22, 1994 (Incorporated by reference to Exhibit 10.4 to Form
10-KSB for the fiscal year ended December 31, 1994)**
10.5 Form of Nonqualified Stock Option Agreement for use under the 1989
Stock Option Plan (Incorporated by reference to Exhibit 10.8 to
Registration Statement on Form S-4, SEC File No. 33-31246)**
<PAGE>
10.6 Construction Loan Agreement dated October 5, 1994 between the Company
and The City of Mankato, Minnesota (Incorporated by reference to
Exhibit 10.9 to Form 10-KSB for the fiscal year ended December 31,
1994)
10.7 $1,935,000 Combination Mortgage, Security Agreement and Fixture
Financing Statement dated August 3, 1994 by the Company to The City of
Mankato, Minnesota (Incorporated by reference to Exhibit 10.10 to Form
10-KSB for the fiscal year ended December 31, 1994)
10.8 Promissory Note of the Company in the principal amount of $1,699,620
dated October 6, 1994 in favor of The City of Mankato, Minnesota
(Incorporated by reference to Exhibit 10.11 to Form 10-KSB for the
fiscal year ended December 31, 1994)
10.9 Development Agreement dated July 29, 1994 between the Company and The
City of Mankato, Minnesota (Incorporated by reference to Exhibit 10.12
to Form 10-KSB for the fiscal year ended December 31, 1994)
10.10 Agreement for Loan of Small Cities Development Program Funds dated
October 6, 1994 between the Company and The City of Mankato, Minnesota
(Incorporated by reference to Exhibit 10.13 to Form 10-KSB for the
fiscal year ended December 31, 1994)
10.11 Promissory Note of the Company in the principal amount of $500,000
dated October 6, 1994 in favor of The City of Mankato, Minnesota
(Incorporated by reference to Exhibit 10.14 to Form 10-KSB for the
fiscal year ended December 31, 1994)
10.12 Supplemental Bonus Plan for W. Kirk Hankins and Lorin Krueger adopted
May 22, 1995 (Incorporated by reference to Exhibit 10.14 to Form 10-KSB
for the fiscal year ended December 31, 1995)**
10.13* Employment Agreement dated January 1, 1999 between the Company and W.
Kirk Hankins**
10.14* Employment Agreement dated January 1, 1999 between the Company and
Lorin E. Krueger**
10.15* Employment Agreement dated January 1, 1999 between the Company and Kirk
P. Hankins**
<PAGE>
10.16* Employment Agreement dated January 1, 1999 between the Company and
Kimberley E. Kleinow**
10.17 Security Agreement dated January 31, 1996 between the Company and
Norwest Bank Minnesota South, National Association (Incorporated by
reference to Exhibit 10.20 to Form 10-KSB for the fiscal year ended
December 31, 1995)
10.18 First Amendment dated October 21, 1996 to Credit Agreement dated
January 31, 1996 between the Company and Norwest Bank Minnesota South,
National Association (Incorporated by reference to Exhibit 10.1 to Form
10-QSB for the quarter ended September 30, 1996)
10.19 Revolving Note dated October 21, 1996 in the principal amount of
$3,500,000 in favor of Norwest Bank Minnesota South, National
Association (Incorporated by reference to Exhibit 10.2 to Form 10-QSB
for the quarter ended September 30, 1996)
10.20 Term Note dated October 21, 1996 in the principal amount of $500,000 in
favor of Norwest Bank Minnesota South, National Association
(Incorporated by reference to Exhibit 10.3 to Form 10-QSB for the
quarter ended September 30, 1996)
10.21 Winland Electronics, Inc. 1997 Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 10.1 to Form 10-QSB for the
quarter ended June 30, 1997)**
10.22 Winland Electronics, Inc. 1997 Stock Option Plan (Incorporated by
reference to Exhibit 10.2 to Form 10-QSB for the quarter ended June 30,
1997)**
10.23 Form of Incentive Stock Option Plan under 1997 Stock Option Plan
(Incorporated by reference to Exhibit 10.3 to Form 10-QSB for the
quarter ended June 30, 1997)**
10.24 Form of Nonqualified Stock Option Plan under 1997 Stock Option Plan
(Incorporated by reference to Exhibit 10.4 to Form 10-QSB for the
quarter ended June 30, 1997)**
10.25* 1999 Bonus Plan**
23.1* Consent of McGladrey & Pullen, LLP
23.2* Consent of Ahern Montag & Vogler, Ltd.
24.1* Power of Attorney for W. Kirk Hankins, Lorin E. Krueger, S. Dessalet,
Kirk P. Hankins, Thomas J. de Petra, David L. Ewert and Peter D. Jones
(included on signature page of this Form 10-KSB)
27* Financial Data Schedule (included in electronic filing only)
* Filed herewith.
** Management agreement or compensatory plan or arrangement.
EMPLOYMENT AGREEMENT
This Agreement is made effective as of this first day of January 1999
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 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 which shall be
set forth in a separate stock option agreement executed by Employee and
Corporation as consideration for entering into this Agreement and in particular
the noncompetition and other restrictions contained in 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 January 1, 1999, and continue thereafter until
December 31, 2003, 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 Initial Term or Term, as applicable, 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
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 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 Board 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
Term, the Corporation shall pay Employee an annual base salary ("Base Salary")
in the amount determined by the Compensation Committee of the Corporation's
Board of Directors. 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 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, if any, shall be
determined by the Compensation Committee of the Board of Directors. If any
Annual Bonus is earned by Employee, it shall be paid within ninety (90) days
after the end of the Corporation's applicable fiscal year, less applicable
withholding taxes and FICA contributions.
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, or eliminate, any such
plan in its discretion from time to time, provided it does so on an equal basis
for all covered employees. The Corporation shall provide Employee with such
increases, if any, to such benefits as are given to other officers of the
Corporation. Upon 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.
<PAGE>
3.4) 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 and documentation 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.
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 hereof,
"disability" shall mean any condition(s). physical or mental, that
results in Employee's inability to fulfill the essential functions of
his job, with reasonable accommodation where such inability by itself
or when combined with previous period of disability during this
Agreement total twenty-six weeks.
(d) By the Corporation, upon ten (10) days written notice to
Employee, "for cause." The term "for cause" shall include but not be
limited to neglect of Employee's duties, conduct 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 or 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.
<PAGE>
(e) By either party, with or without cause, upon delivery of
the Nonrenewal Notice as provided in Section 1.2.
4.2) Termination of Compensation. If Employee's employment is
terminated pursuant to Section 4.1 hereof, then Employee shall not be entitled
to any further compensation or benefits under Article 3, except for compensation
and benefits applicable to period prior to the date of termination or as
determined by the Board of Directors.
4.3) Continuation of Insurance Benefits. The insurance benefits
provided to Employee by the Corporation pursuant to Section 3.3 may be continued
at Employee's expense 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.
4.4) 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.
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 or use 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 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,
consultant 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.
<PAGE>
(b) Nonsolicitation of Customers. Employee agrees he will not,
during his employment and for a two-year period immediately following
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 his employment and for a two-year period immediately following
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 or threatened 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, use or
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 and insurance)
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 contractual 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, provided, however, that Employee
shall continue to be bound by paragraph 5.1(e).
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.
<PAGE>
6.5) Attorneys' Fees. In the event Employee prevails in an action
against the Corporation 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 materially 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;
(v) The taking of any action by the Corporation that
would materially and adversely affect the workplace
environment existing at the time of the Change of Control in
or under which Employee performs his employment duties;
<PAGE>
(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 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 failure of either party hereto to enforce
its rights under any provision of this Agreement shall not operate or be
construed as a waiver of such breach or 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/ Lorin E. Krueger
Its President and COO
/s/ W. Kirk Hankins
W. Kirk Hankins
EMPLOYMENT AGREEMENT
This Agreement is made effective as of this first day of January 1999
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 President and
Chief Operating 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 which shall be
set forth in a separate stock option agreement executed by Employee and
Corporation as consideration for entering into this Agreement and in particular
the noncompetition and other restrictions contained in 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 January 1, 1999, and continue thereafter until
December 31, 2003, 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 Initial Term or Term, as applicable, 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 and Chief Operating 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 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 Board 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
Term, the Corporation shall pay Employee an annual base salary ("Base Salary")
in the amount determined by the Compensation Committee of the Corporation's
Board of Directors, provided that such amount shall not be less than the Base
Salary for the immediately preceding fiscal year without the consent of the
Employee. 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 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, if any, shall be
determined by the Compensation Committee of the Board of Directors. If any
Annual Bonus is earned by Employee, it shall be paid within ninety (90) days
after the end of the Corporation's applicable fiscal year, less applicable
withholding taxes and FICA contributions.
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, or eliminate, any such
plan in its discretion from time to time, provided it does so on an equal basis
for all covered employees. The Corporation shall provide Employee with such
increases, if any, to such benefits as are given to other officers of the
Corporation. Upon 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.
<PAGE>
3.4) 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 and documentation 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.
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 hereof,
"disability" shall mean any condition(s), physical or mental, that
results in Employee's inability to fulfill the essential functions of
his job, with reasonable accommodation, where such inability continues
for at least twenty-six consecutive weeks.
(d) By the Corporation, upon ten (10) days written notice to
Employee, "for cause." The term "for cause" shall include but not be
limited to neglect of Employee's duties, conduct 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 or 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.
<PAGE>
(e) By either party, with or without cause, upon delivery of
the Nonrenewal Notice as provided in Section 1.2.
4.2) Termination of Compensation. If Employee's employment is
terminated pursuant to Section 4.1 hereof, then Employee shall not be entitled
to any further compensation or benefits under Article 3, except for compensation
and benefits applicable to period prior to the date of termination or as
determined by the Board of Directors.
4.3) Continuation of Insurance Benefits. The insurance benefits
provided to Employee by the Corporation pursuant to Section 3.3 may be continued
at Employee's expense 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.
4.4) 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.
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 or use 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 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,
consultant 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.
<PAGE>
(b) Nonsolicitation of Customers. Employee agrees he will not,
during his employment and for a two-year period immediately following
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 his employment and for a two-year period immediately following
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 or threatened 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, use or
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 compensation (including (i) Base Salary, (ii) Annual
Bonuses, and (iii) the total of lease payments paid by the Company for any
vehicle used by Employee, but excluding non-cash fringe benefits such as
insurance) 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. Notwithstanding the foregoing, in no event shall the payments under this
Section 6.2, when combined with any other payments or benefits received or to be
received, exceed the maximum amount payable to Employee under section 280G of
the Internal Revenue Code without being treated as an "excess parachute payment"
that is subject to limitations on deductibility by the Company.
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 contractual 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, provided, however, that Employee
shall continue to be bound by paragraph 5.1(e).
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.
<PAGE>
6.5) Attorneys' Fees. In the event Employee prevails in an action
against the Corporation 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 materially 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;
(v) The taking of any action by the Corporation that
would materially and adversely affect the workplace
environment existing at the time of the Change of Control in
or under which Employee performs his employment duties;
<PAGE>
(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 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 failure of either party hereto to enforce
its rights under any provision of this Agreement shall not operate or be
construed as a waiver of such breach or 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
Its Chief Executive Officer
/s/ Lorin E. Krueger
Lorin E. Krueger
EMPLOYMENT AGREEMENT
This Agreement is made effective as of this first day of January 1999
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 which shall be
set forth in a separate stock option agreement executed by Employee and
Corporation as consideration for entering into this Agreement and in particular
the noncompetition and other restrictions contained in 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 January 1, 1999, and continue thereafter until
December 31, 2003, 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 Initial Term or Term, as applicable, 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 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 Board 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
Term, the Corporation shall pay Employee an annual base salary ("Base Salary")
in the amount determined by the Compensation Committee of the Corporation's
Board of Directors, provided that such amount shall not be less than the Base
Salary for the immediately preceding fiscal year without the consent of the
Employee. 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 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, if any, shall be
determined by the Compensation Committee of the Board of Directors. If any
Annual Bonus is earned by Employee, it shall be paid within ninety (90) days
after the end of the Corporation's applicable fiscal year, less applicable
withholding taxes and FICA contributions.
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, or eliminate, any such
plan in its discretion from time to time, provided it does so on an equal basis
for all covered employees. The Corporation shall provide Employee with such
increases, if any, to such benefits as are given to other officers of the
Corporation. Upon 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.
<PAGE>
3.4) 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 and documentation 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.
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 hereof,
"disability" shall mean any condition(s), physical or mental, that
results in Employee's inability to fulfill the essential functions of
his job, with reasonable accommodation where such inability continues
for at least twenty-six consecutive weeks.
(d) By the Corporation, upon ten (10) days written notice to
Employee, "for cause." The term "for cause" shall include but not be
limited to neglect of Employee's duties, conduct 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 or 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.
<PAGE>
(e) By either party, with or without cause, upon delivery of
the Nonrenewal Notice as provided in Section 1.2.
4.2) Termination of Compensation. If Employee's employment is
terminated pursuant to Section 4.1 hereof, then Employee shall not be entitled
to any further compensation or benefits under Article 3, except for compensation
and benefits applicable to period prior to the date of termination or as
determined by the Board of Directors.
4.3) Continuation of Insurance Benefits. The insurance benefits
provided to Employee by the Corporation pursuant to Section 3.3 may be continued
at Employee's expense 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.
4.4) 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.
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 or use 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 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,
consultant 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.
<PAGE>
(b) Nonsolicitation of Customers. Employee agrees he will not,
during his employment and for a two-year period immediately following
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 his employment and for a two-year period immediately following
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 or threatened 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, use or
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 compensation (including (i) Base Salary, (ii) Annual
Bonuses, and (iii) the total of lease payments paid by the Company for any
vehicle used by Employee, but excluding non-cash fringe benefits such as
insurance) 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. Notwithstanding the foregoing, in no event shall the payments under this
Section 6.2, when combined with any other payments or benefits received or to be
received, exceed the maximum amount payable to Employee under section 280G of
the Internal Revenue Code without being treated as an "excess parachute payment"
that is subject to limitations on deductibility by the Company.
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 contractual 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, provided, however, that Employee
shall continue to be bound by paragraph 5.1(e).
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.
<PAGE>
6.5) Attorneys' Fees. In the event Employee prevails in an action
against the Corporation 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 materially 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;
(v) The taking of any action by the Corporation that
would materially and adversely affect the workplace
environment existing at the time of the Change of Control in
or under which Employee performs his employment duties;
<PAGE>
(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 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 failure of either party hereto to enforce
its rights under any provision of this Agreement shall not operate or be
construed as a waiver of such breach or 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/ Lorin E. Krueger
Its President and COO
/s/ Kirk P. Hankins
Kirk P. Hankins
EMPLOYMENT AGREEMENT
This Agreement is made effective as of this first day of January 1999
between Winland Electronics, Inc., a Minnesota corporation (the "Corporation"),
and Kimberly E. Kleinow ("Employee").
R E C I T A L S:
A. Employee is presently employed by the Corporation as Vice President
of Procurement and Materials 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 which shall be
set forth in a separate stock option agreement executed by Employee and
Corporation as consideration for entering into this Agreement and in particular
the noncompetition and other restrictions contained in 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 January 1, 1999, and continue thereafter until
December 31, 2003, 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 Initial Term or Term, as applicable, 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 Procurement and Materials 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 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 Board 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 her
duties.
2.2) Extent of Service. Employee shall devote her 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 her 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
Term, the Corporation shall pay Employee an annual base salary ("Base Salary")
in the amount determined by the Compensation Committee of the Corporation's
Board of Directors, provided that such amount shall not be less than the Base
Salary for the immediately preceding fiscal year without the consent of the
Employee. 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 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, if any, shall be
determined by the Compensation Committee of the Board of Directors. If any
Annual Bonus is earned by Employee, it shall be paid within ninety (90) days
after the end of the Corporation's applicable fiscal year, less applicable
withholding taxes and FICA contributions.
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, or eliminate, any such
plan in its discretion from time to time, provided it does so on an equal basis
for all covered employees. The Corporation shall provide Employee with such
increases, if any, to such benefits as are given to other officers of the
Corporation. Upon termination of this Agreement, Employee shall have the right
to purchase at fair market value all policies of insurance which insure her life
and are owned by the Corporation or any subsidiary of the Corporation.
<PAGE>
3.4) 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 and documentation 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 her reasonable transportation, lodging,
and meal expense incurred in compliance with such request.
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 her 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 hereof,
"disability" shall mean any condition(s), physical or mental, that
results in Employee's inability to fulfill the essential functions of
her job, with reasonable accommodation, where such inability continues
for at least twenty-six consecutive weeks.
(d) By the Corporation, upon ten (10) days written notice to
Employee, "for cause." The term "for cause" shall include but not be
limited to neglect of Employee's duties, conduct 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 or 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.
<PAGE>
(e) By either party, with or without cause, upon delivery of
the Nonrenewal Notice as provided in Section 1.2.
4.2) Termination of Compensation. If Employee's employment is
terminated pursuant to Section 4.1 hereof, then Employee shall not be entitled
to any further compensation or benefits under Article 3, except for compensation
and benefits applicable to period prior to the date of termination or as
determined by the Board of Directors.
4.3) Continuation of Insurance Benefits. The insurance benefits
provided to Employee by the Corporation pursuant to Section 3.3 may be continued
at Employee's expense 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.
4.4) 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 her possession during her employment by the Corporation.
ARTICLE 5
RESTRICTION AGAINST COMPETITION; CONFIDENTIALITY
5.1) Restriction Against Competition. Employee acknowledges that she 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, she 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 or use 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 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 she
shall be prevented from engaging in the business as an individual,
shareholder, owner, partner, director, officer, employee, agent,
consultant or salesman for any person, corporation, partnership or
other entity and agrees that she will not finance, facilitate, promote
or encourage any person to initiate or continue in the prohibited
business for the period provided.
<PAGE>
(b) Nonsolicitation of Customers. Employee agrees she will
not, during her employment and for a two-year period immediately
following termination of her 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 her supervision, had contacts
during the year preceding termination of her 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 she will
not, during her employment and for a two-year period immediately
following termination of her 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 or threatened 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, use or
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 compensation (including (i) Base Salary, (ii) Annual
Bonuses, and (iii) the total of lease payments paid by the Company for any
vehicle used by Employee, but excluding non-cash fringe benefits such as
insurance) 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. Notwithstanding the foregoing, in no event shall the payments under this
section 6.2, when combined with any other payments or benefits received or to be
received, exceed the maximum amount payable to Employee under section 280G of
the Internal Revenue Code without being treated as an "excess parachute payment"
that is subject to limitations on deductibility by the Company.
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 contractual 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, provided, however, that Employee
shall continue to be bound by paragraph 5.1(e).
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.
<PAGE>
6.5) Attorneys' Fees. In the event Employee prevails in an action
against the Corporation to enforce or defend her 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 materially 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;
(v) The taking of any action by the Corporation that
would materially and adversely affect the workplace
environment existing at the time of the Change of Control in
or under which Employee performs her employment duties;
<PAGE>
(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 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 failure of either party hereto to enforce
its rights under any provision of this Agreement shall not operate or be
construed as a waiver of such breach or 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 her 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/ Lorin E. Krueger
Its President and COO
/s/ Kimberley E. Kleinow
Kimberly E. Kleinow
EXHIBIT 10.25
1999 BONUS PLAN
In an effort to enhance Winland's long-term value to shareholder, the
Compensation Committee implemented a fundamental change in the method of
calculating the Company's 1999 Bonus Plan.
1. Specifically, the Committee determined that it was in the best interest
of shareholders and the company to retain the first 5% of sales in the
form of pretax income, prior to the payment of bonus.
2. At the same time the Committee established this 5% threshold of pretax
income, it also elected to increase the bonus "pool" to 20% of pretax
income after the first 5%. During 1998, the bonus pool was calculated
at 13% of pretax income as a whole.
3. Distribution of the 1999 Bonus Plan:
W. Kirk Hankins 20%
Lorin E. Krueger 20%
Vice Presidents 40%
Others 20%
------------------------------------
Total 100%
The Committee appreciates the high levels of energy, enthusiasm, dedication and
creativity demonstrated by the Winland management team. These characteristics,
combined with excellent leadership skills, sound planning and progressive staff
development, have helped deliver outstanding results. Everyone is to be
congratulated. Thank you.
Adopted by the Compensation Committee on December 28, 1998.
EXHIBIT 23.1
Consent of Independent Auditors
We hereby consent to the incorporation by reference of our report dated January
29, 1999 with respect to the financial statements of Winland Electronics, Inc.
(the "Company") included in this Form 10-KSB into the Company's previously filed
Registration Statements on Form S-3, No. 333-723, and on Form S-8, No. 33-46710,
No. 33-81880, No. 33-73328, No. 333-27727 and No. 333-27729.
/s/ McGladrey & Pullen, LLP
Minneapolis, Minnesota
March 15, 1999
EXHIBIT 23.2
Consent of Independent Auditors
We hereby consent to the incorporation by reference of our report dated February
4, 1998 with respect to the financial statements of Winland Electronics, Inc.
(the "Company") included in this Form 10-KSB into the Company's previously filed
Registration Statements on Form S-3, No. 333-723, and on Form S-8, No. 33-46710,
No. 33-81880, No. 33-73328, No. 333-27727 and No. 333-27729.
/s/Ahern Montag & Vogler, Ltd.
AHERN MONTAG & VOGLER, LTD.
Mankato, Minnesota
March 5, 1999
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