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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to _______________

Commission File No.:  1-15637

WINLAND ELECTRONICS, INC.

(Exact name of registrant in its charter)

Minnesota		41-0992135
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

1950 Excel Drive, Mankato Minnesota		56001
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code:  (507) 625-7231

 

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Title of Each Class

Common Stock, $.01 par value

Preferred Stock Purchase Rights

Securities registered pursuant to Section 12(g) of the Exchange Act: 

 

 

 

 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller Reporting Company þ

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			PAGE
PART I
	ITEM 1.	DESCRIPTION OF BUSINESS.	3
	ITEM 1A.	RISK FACTORS.	3 - 6
	ITEM 1B.	UNRESOLVED STAFF COMMENTS.	6
	ITEM 2.	DESCRIPTION OF PROPERTY.	6 - 7
	ITEM 3.	LEGAL PROCEEDINGS.	7
	ITEM 4.	MINE SAFETY DISCLOSURES	7
PART II
	ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.	7
	ITEM 6.	SELECTED FINANCIAL DATA.	7
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.	7 - 12
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	12
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.	13 - 27
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.	28
	ITEM 9A.	CONTROLS AND PROCEDURES.	28 - 29
	ITEM 9B.	OTHER INFORMATION.	29
PART III
	ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.	29 - 30
	ITEM 11.	EXECUTIVE COMPENSATION.	30 - 33
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.	33 - 34
	ITEM 13.	CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.	35
	ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES.	35
	ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	35
SIGNATURES			36 - 37
EXHIBIT INDEX			38 - 40
Certification of Chief Financial Officer and Senior Vice President Pursuant to Section 302			41
Certification of Chief Financial Officer and Senior Vice President Pursuant to Section 906			42

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Fiscal Year Ended December 31, 2013		Low				High
First Quarter		$	0.60			$	0.88
Second Quarter		$	0.63			$	0.89
Third Quarter		$	0.55			$	0.82
Fourth Quarter		$	0.30			$	0.75
Fiscal Year Ended December 31, 2012		Low				High
First Quarter		$	0.44			$	0.83
Second Quarter		$	0.47			$	0.80
Third Quarter		$	0.40			$	0.67
Fourth Quarter		$	0.43			$	0.85

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Our solutions include:

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Report of Independent Registered Public Accounting Firm as of and for the Years Ended December 31, 2013 and 2012	14
Balance Sheets as of December 31, 2013 and 2012	15
Statements of Operations for the Years Ended December 31, 2013 and 2012	16
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2013 and 2012	17
Statements of Cash Flows for the Years Ended December 31, 2013 and 2012	18
Notes to Financial Statements	19 - 27

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Winland Electronics, Inc.

Balance Sheets

As of December 31, 2013 and 2012

(In Thousands)

		December 31,
Assets		2013				2012
Current Assets
Cash and cash equivalents		$	741			$	390
Funds held in escrow from sale of manuafacturing facility, including land (Note 6)			-				2,641
Accounts receivable, less allowance for doubtful accounts of $7as of both December 31, 2013 and 2012 (Note 9)			509				516
Inventories (Note 2)			366				884
Prepaid expenses and other assets			98				56
Total current assets			1,714				4,487
Property and Equipment, at cost (Note 1)
Machinery and equipment			213				153
Data processing equipment			107				125
Office furniture and equipment			19				43
Total property and equipment			339				321
Less accumulated depreciation and amortization			243				278
Net property and equipment			96				43
Long-term inventories (Note 2)			56				-
Total assets		$	1,866			$	4,530
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable		$	277			$	503
Accrued liabilities:
Compensation (Note 11)			130				60
Other			68				30
Total current liabilities			475				593
Commitments and Contingencies
Stockholders’ Equity (Notes 5 and 10)
Common stock, par value $0.01 per share; authorized 20,000,000shares; issued and outstanding 3,789,522 and 3,701,630 shares as of December 31, 2013 and 2012, respectively			38				37
Additional paid-in capital			5,123				5,055
Accumulated deficit			(3,770	)			(1,155	)
Total stockholders’ equity			1,391				3,937
Total liabilities and stockholders’ equity		$	1,866			$	4,530

See Notes to Financial Statements

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Winland Electronics, Inc.

Statements of Operations

For the Years Ended December 31, 2013 and 2012

(In Thousands, Except Share and Per Share Data)

 

		December 31,
		2013				2012
Net sales (Note 9)		$	3,640			$	3,713
Cost of sales			2,741				2,622
Gross profit			899				1,091
Operating expenses:
General and administrative			1,540				762
Sales and marketing			1,075				688
Research and development			902				285
			3,517				1,735
Operating loss			(2,618	)			(644	)
Other income:
Other, net			3				10
			3				10
Loss from continuing operations before income taxes			(2,615	)			(634	)
Income tax expense (Note 4)			-				-
Loss from continuing operations			(2,615	)			(634	)
Income from discontinued operations, net of tax			-				655
Net income (loss)		$	(2,615	)		$	21
Income (loss) per common share data:
Basic and diluted		$	(0.70	)		$	0.01
Loss from continuing operations per common share data:
Basic and diluted		$	(0.70	)		$	(0.17	)
Income from discontinued operations per common share data:
Basic and diluted		$	-			$	0.18
Weighted-average number of common shares outstanding:
Basic and diluted			3,753,561				3,701,630

See Notes to Financial Statements

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Winland Electronics, Inc.

Statements of Changes in Stockholders’ Equity

For the Years Ended December 31, 2013 and 2012

(In Thousands, Except Share Data)

 

										Additional
		Common Stock								Paid-In				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balance on December 31, 2011			3,701,630			$	37			$	5,014			$	(1,176	)		$	3,875
Stock-based compensation expense			-				-				41				-				41
Net income			-				-				-				21				21
Balance on December 31, 2012			3,701,630				37				5,055				(1,155	)			3,937
Issuance of restricted common stock			87,892				1				59				-				60
Stock-based compensation expense			-				-				9				-				9
Net income			-				-				-				(2,615	)			(2,615	)
Balance on December 31, 2013			3,789,522			$	38			$	5,123			$	(3,770	)		$	1,391

See Notes to Financial Statements

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Winland Electronics, Inc.

Statements of Cash Flows

For the Years Ended December 31, 2013 and 2012

(In Thousands)

 

		2013				2012
Cash Flows From Operating Activities
Net income (loss)		$	(2,615	)		$	21
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization			28				32
Non-cash stock based compensation expense			69				41
Gain on sale of facility, including land			-				(506	)
Increase in allowance for obsolete inventory			215				-
Changes in operating assets and liabilities:
Accounts receivable			7				(67	)
Inventories			247				(317	)
Deferred rent receivable			-				261
Prepaid expenses and other assets			(42	)			(25	)
Accounts payable			(226	)			82
Accrued liabilities, including deferred revenue			108				(156	)
Net cash used in operating activities			(2,209	)			(634	)
Cash Flows From Investing Activities
Purchases of property and equipment			(81	)			(7	)
Receipt of funds held in escrow			2,641				-
Net cash provided by (used in) investing activities			2,560				(7	)
Net increase (decrease) in cash and cash equivalents			351				(641	)
Cash and cash equivalents
Beginning of year			390				1,031
End of year		$	741			$	390
Non-cash investing activities:
Funds held in escrow from sale of manufacturing facility		$	-			$	2,641

See Notes to Financial Statements

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Note 1.  Nature of Business and Significant Accounting Policies

Nature of business: Winland Electronics, Inc. (“Winland” or the “Company”) provides a line of proprietary environmental monitoring products to the security industry. In most cases, these products are manufactured to protect against loss of assets due to damage from water, excess humidity, extremes of temperature and loss of power. These Winland branded and trademarked products accounted for 100% of the Company’s revenue in 2013 and 2012.

Discontinued Operations: Included in discontinued operations is Winland’s land and building.  The assets were not classified as non-current discontinued assets prior to the sale of the assets on December 31, 2012, as the Company received significant cash flows from the asset group until the sale date.  As a result of the sale of the land and building on December 31, 2012, the Company determined it would not have any significant continuing involvement in the operations of the asset group after the disposal date and, therefore, reclassified for all periods presented the operations and the gain on sale of the land and building as discontinued operations.

This transaction met the requirements of ASC 205-20 “Discontinued Operations” as being held for sale as December 31, 2012. Accordingly, the Company has restated the previously reported financial results to report the net results as a separate line in the statements of operations as “Income from discontinued operations, net of tax” for all periods presented. In accordance with ASC 205-20-S99-3 “Allocation of Interest to Discontinued Operations”, the Company elected to not allocate interest expense to the discontinued operations where the debt is not directly attributed to or related to the discontinued operations.  Notes to the financial statements have been revised to reflect only the results of continuing operations (see Note 6).

A summary of Winland’s significant accounting policies follow:

Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates include allowances for obsolete inventories, rework and warranties, valuation of long-lived assets and doubtful accounts.  Winland cannot assure that actual results will not differ from those estimates.

Revenue Recognition: Revenue is recognized from the sale of products and out of warranty repairs when the product is delivered to a common carrier for shipment and title transfers.

Shipping and handling charges billed to customers are included in net sales, and shipping and handling costs incurred by the Company are included in cost of sales. For all sales, Winland has a binding purchase order from the customer.  Winland does not generally accept returns but does provide a limited warranty as outlined below under Allowance for Rework and Warranty Costs.  Sales and use taxes are reported on a net basis, excluding them from sales and cost of sales.

Cash and cash equivalents: Cash and cash equivalents include money market mutual funds and other highly liquid investments defined as maturities of three months or less from date of purchase.  Winland maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Winland has not experienced any losses in such accounts.

Allowance for Doubtful Accounts:  The Company generally requires no collateral from its customer with respect to trade accounts receivable.   Invoices are generally due 30 days after presentation. Accounts receivable over 30 days are considered past due.  No interest is charged on past due accounts. Winland evaluates its allowance for uncollectible accounts on a quarterly basis and reviews any significant customers with delinquent balances to determine future collectability. Winland bases its determinations on legal issues, past history, current financial and credit agency reports, and experience. Winland reserves for accounts deemed to be uncollectible in the quarter in which the determination is made.  Management believes these values are estimates and may differ from actual results.  Winland believes that, based on past history and credit policies, the net accounts receivable are of good quality.  The Company writes off accounts receivable when they are deemed uncollectible and records recoveries of trade receivables previously written off when collected.  The Allowance for Doubtful Accounts was $7 at both December 31, 2013 and 2012.

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Note 1.  Nature of Business and Significant Accounting Policies (Continued)

Inventory Valuation: Raw component and finished goods inventories are stated at the lower of cost, using the first-in, first-out (FIFO) method, or market value.  Winland estimates excess, slow moving and obsolete reserves for inventory on a quarterly basis based upon order demand and production requirements for its major customers and annual reviews for other customers.  Management’s estimated reserve for slow moving and obsolete finished goods inventories was $239 and $24 as of December 31, 2013 and 2012, respectively.

Depreciation: Depreciation is computed using the straight-line method based on the estimated useful lives of the various assets, as follows:

		Years
Machinery and equipment			5 – 7
Data processing equipment			3 – 7
Office furniture and equipment			3 – 7

Allowance for Rework and Warranty Costs:  Winland provides a limited warranty for its products for a period of one year, which requires Winland to repair or replace defective product at no cost to the customer or refund the purchase price.  Reserves are established based on historical experience and analysis for specific known and potential warranty issues.  The reserve reflecting historical experience and potential warranty issues is determined based on experience factors including rate of return by item, average weeks outstanding from production to return, average cost of repair and relation of repair cost to original sales price.  Any specific known warranty issues are considered individually.   These are analyzed to determine the probability and the amount of financial exposure, and a specific reserve is established.  The allowance for rework and warranty costs was $15 at both December 31, 2013 and 2012.  The product warranty liability reflects management’s best estimate of probable liability under Winland’s product warranties and may differ from actual results.

Changes in Winland’s warranty liability, which is included in other accrued liabilities on the balance sheets, are approximately as follows:

		For the Years Ended December 31,
($ in thousands)		2013				2012
Balance, Beginning		$	15			$	13
Accruals for products sold			10				20
Expensing of specific warranty items			(10	)			(15	)
Change in estimate			-				(3	)
Balance, Ending		$	15			$	15

 

In assessing the realizability of deferred income tax assets, Winland considers whether it is "more likely than not," according to the criteria that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

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Note 1.  Nature of Business and Significant Accounting Policies (Continued)

Per FASB ASC 740-10-25-5 Winland recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

Fair value of financial instruments: The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature of these instruments.

Income (loss) per common share: Basic income (loss) per common share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per common share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period, including potentially dilutive shares such as the options and warrants to purchase shares of common stock at various amounts per share (see Note 5).

For years ended December 31, 2013 and 2012, the diluted loss per share was the same as basic loss per share since the effects of options and warrants would have been anti-dilutive. The diluted share calculation excluded 303,000 and 471,000 shares for the years ended December 31, 2013 and 2012, respectively, as inclusion of these shares would have been anti-dilutive.

Employee stock based compensation plans: At December 31, 2013, Winland had stock-based compensation plans, which are described more fully in Note 5.  Winland accounts for these plans under FASB ASC Topic 718, Stock Compensation.

Advertising expense:  Advertising is expensed as incurred and was $7 and $14 for the years ended December 31, 2013 and 2012, respectively.

Research and Development Expense:  The Company expenses research and development costs as incurred.  Research and development expenses of $902 and $285 were charged to operations during the years ended December 31, 2013 and 2012, respectively.

 

Subsequent events:  The Company evaluates events occurring after the date of the financial statements for events requiring recording or disclosure in the financial statements.

 

Note 2.  Inventories

 

The components of inventories at December 31, 2013 and 2012 were as follows:

 

		December 31
		2013				2012
Raw materials		$	16			$	114
Finished goods			406				770
Total, net		$	422			$	884

 

As of December 31, 2013, $56 represents long-term inventories, net that the Company does not expect to sell within the next twelve months and do not consider these items excess or obsolete.  The December 31, 2012 balance was all considered short-term inventory.

 

Note 3.  Deferred Revenue

During 1994, Winland and the city of Mankato entered into a tax increment financing agreement for the construction of its operating facility. In connection with this agreement, the city donated land improvements to Winland with a fair value of

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Note 3.  Deferred Revenue (Continued)

$270. The fair value of land improvements donated was accounted for as deferred revenue and is being amortized over 39 years, which is the life of the building.  On December 31, 2012, deferred revenue remaining of $106 was recognized as income due to the sale of the manufacturing facility and is included in income from discontinued operations on the Statement of Operations for the year ended December 31, 2012.

 

Note 4.  Income Taxes

The statutory income tax rate reconciliation for continuing operations to the effective rate is as follows:

		December 31
		2013				2012
Statutory U.S. income tax rate			34	%			34	%
State benefit, net of federal tax effect			1				4
Change in valuation allowance			(35	)			(40	)
Other, including permanent differences			-				2
Effective income tax benefit rate			-	%			-	%

Deferred tax assets (liabilities) consist of the following components as of:

		December 31
		2013				2012
Deferred tax assets:
Inventory		$	89			$	23
Allowance for doubtful accounts			2				2
Non-qualified stock options			95				89
Accrued expenses			2				3
Research credit carryover			8				8
Net operating loss carryforward			2,584				1,733
Other			14				23
Valuation allowance			(2,743	)			(1,853	)
			51				28
Deferred tax liabilities:
Property and equipment			(19	)			(9	)
Prepaid expenses			(32	)			(19	)
			(51	)			(28	)
Net deferred tax assets		$	-			$	-

Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The Company records a tax valuation allowance when it is more likely than not that it will not be able to recover the value of its deferred tax assets.  The valuation allowance for deferred tax assets as of December 31, 2013 and 2012 was $2,743 and $1,853, respectively. The net change in the total valuation allowance for the years ended December 31, 2013 and 2012 was an increase (decrease) of $890 and $(36), respectively.  The tax effect of the Company’s valuation allowance for deferred tax assets is included in the annual effective tax rate.

The Company calculated its estimated annualized effective tax expense (benefit) rate at 0% for both December 31, 2013 and 2012.  The Company had no income tax expense based on its $2,615 pre-tax loss from continuing operations for the year ended 2013.  The Company had no income tax expense based on its $634 pre-tax loss from continuing operations for the year ended 2012.

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Note 4.  Income Taxes (Continued)

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit.  For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

 The Company files income tax returns in the U.S. federal and state jurisdictions with years 2010 through 2013 remaining open for examination by the IRS and state agencies.

The Company recognizes interest accrued on unrecognized tax benefits as well as interest received from favorable tax settlements within interest expense.  The Company recognizes penalties accrued on unrecognized tax benefits within general and administrative expenses.  As of December 31, 2013 and 2012, the Company recognized no interest or penalties related to uncertain tax positions due to their insignificance to its financial position and results of operations.

At December 31, 2013, the Company had net operating loss carryforwards for federal purposes of $6,712 and $4,660 for state income tax purposes that are available to offset future taxable income and begin to expire in the year 2022. At December 31, 2013, the Company had Minnesota research and development tax credit carryforwards of $12, which begin to expire in the year 2022.

The Company does not anticipate that the total amount of unrecognized tax benefits will change significantly in the next twelve months.

Note 5.  Warrants and Stock-Based Compensation Plans

Warrants: The Company has warrants outstanding to purchase 2,500 shares of common stock at a weighted average exercise price of $4.01 per share.  These warrants were granted prior to 2007 and expire on February 16, 2016.

Stock option plans: As of December 31, 2013, Winland had one equity-based compensation plan, the 2013 Equity Incentive Plan, from which stock-based compensation awards can be granted to eligible employees, officers or directors.  Previous to this plan, stock-based compensation awards were granted from the 2008 and 2005 Equity Incentive Plan.  The plans are as follows:

2013 Equity Incentive Plan – This plan provides awards in the form of incentive stock options, nonqualified stock options, and restricted stock.  Currently, this is the only plan under which awards are authorized for grant.  As approved by the shareholders in May 2013, up to 350,000 shares are authorized for issuance under the plan.  Awards issued under the plan as of December 31, 2013 include 30,000 shares of incentive stock options of which none are vested at December 31, 2013.  The exercise price is equal to the fair market value of Winland’s common stock at the date of grant. Options generally vest over five years and have a contractual life up to ten years.  Option awards provide for accelerated vesting if substantially all of Winland’s assets are transferred through an acquisition, merger, reorganization or other similar change of control transaction.  The Company issues new shares upon the exercise of options.

2008 Equity Incentive Plan – This plan provided grants in the form of incentive stock options, nonqualified stock options, and restricted stock.  This plan was terminated as to future grants in May 2013.  As of December 31, 2013, there were 259,500 options outstanding under this plan of which 209,500 are vested.

2005 Equity Incentive Plan – This plan provided grants in the form of incentive stock options, nonqualified stock options, and restricted stock.  This plan was terminated as to future grants in May 2008.  As of December 31, 2013, there were 11,000 options outstanding under this plan of which 11,000 are vested.

Winland uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards with the following weighted-average assumptions for the indicated periods.

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Note 5.  Warrants and Stock-Based Compensation Plans (Continued)

		December 31
		2013				2012
Expected life, in years			4				4
Expected volatility			79.1	%			79.1	%
Risk-free interest rate			0.4	%			0.4	%
Dividend yield			0.0	%			0.0	%

Winland calculates the expected life of awards using historical data to estimate option exercises and employee terminations.  Expected volatility is based on daily historical fluctuations of Winland’s common stock using the closing market value for the number of days of the expected term immediately preceding the grant.  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for a bond with a similar term.  The dividend yield is based on the expectation that Winland will not pay dividends.

Winland receives a tax deduction for certain stock option exercises and disqualifying stock dispositions during the period the options are exercised or the stock is sold, generally for the excess of the price at which the shares are sold over the exercise prices of the options.  In accordance with FASB ASC 718-10-50-1, Winland revised its presentation in the Statements of Cash Flows to report any tax benefit from the exercise of stock options as financing cash flows.  For the years ended December 31, 2013 and 2012, there were no such stock option exercises and disqualifying stock dispositions.  No options were exercised for the years ended December 31, 2013 and 2012.

The following table represents stock option activity for the years ended December 31, 2013 and 2012:

		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contract Life				Aggregate Intrinsic Value
Outstanding options at January 1, 2012			187,500			$	1.62
Granted			305,000				0.72
Forfeited			(24,000	)			3.62
Outstanding options at December 31, 2012			468,500			$	0.93				8.2			$	42
Exercisable at December 31, 2012			283,500			$	0.99				7.1			$	42
Outstanding options at January 1, 2013
Granted			285,000				0.66
Forfeited			(453,000	)			0.86
Outstanding options at December 31, 2013			300,500			$	0.78				6.4			$	6
Exercisable at December 31, 2013			220,500			$	0.81				5.4			$	6

The aggregate intrinsic value of options outstanding and options exercisable is based upon the Company’s closing stock price on the last trading day of the fiscal year for the in-the-money options.

The weighted average fair value of stock options granted with an exercise price equal to the deemed stock price on the date of grant was $0.41 during both 2013 and 2012.

The total fair value of shares vested during the years ended December 31, 2013 and 2012 was $0 and $38, respectively.

The following table summarizes information about stock options outstanding at December 31, 2013:

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Note 5.  Warrants and Stock-Based Compensation Plans (Continued)

			Options Outstanding												Options Exercisable
Range of Exercise Prices			Number of Shares				Weighted-Average Remaining Contractual Life (Years)				Weighted- Average Exercise Price				Number of Shares				Weighted- Average Exercise Price
$0.448 - $0.896				273,000				6.6			$	0.64				193,000			$	0.63
$0.896 - $1.792				16,500				4.3				1.74				16,500				1.74
$1.792 - $2.240				5,500				4.0				2.23				5,500				2.23
$2.240 - $3.584				5,500				3.4				3.25				5,500				3.25
				300,500				6.4			$	0.78				220,500			$	0.81

At December 31, 2013, there was $19 unrecognized compensation cost, adjusted for estimated forfeitures, related to share-based payments which is expected to be recognized over a weighted-average period of 2.2 years and will be adjusted for any future changes in estimated forfeitures.

Note 6.  Discontinued Operations

On January 1, 2011, Nortech entered into a commercial building lease (the “Lease”) with the Company to lease the entire office and manufacturing facility located at 1950 Excel Drive, Mankato, MN from the Company.  The term of the Lease was scheduled to terminate on January 1, 2017 with Nortech required to pay rent of $5.25 per square foot ($305 annually) commencing on January 1, 2012.  The Lease provided for a 2.5% increase on the third anniversary and requires Nortech to pay all operating costs including real estate taxes.  Nortech also had the right of first refusal upon sale of the property as defined in the Lease.  The lease terminated on December 31, 2012 with the sale of the building as noted below.

On November 27, 2012, Winland executed a Purchase Agreement (“Agreement”) with Nortech Systems, Inc. (“Nortech”) to sell the above mentioned facility and land.  The agreed upon purchase price was $2,650.  Winland and Nortech executed the closing documents on December 31, 2012 with the funds placed in to escrow with North American Title Company.  Winland received the funds on January 8, 2013.  The building and land had a carrying cost of $2,135, resulting in a gain of $506, after deducting expenses related to the sale of $9.  Rental revenue for the year ended December 31, 2012, was $261 reduced by $218 for the reversal of unamortized rental revenue recognized on the straight-line basis in 2011.  For the year ended December 31, 2012, the Company also recognized income of $106 related to the remaining unamortized deferred revenue associated with the tax increment financing associated with the facility.

The assets were not classified as non-current discontinued assets prior to the sale of the assets on December 31, 2012, as the Company received significant cash flows from the asset group until the sale date.  As a result of the sale of the land and building on December 31, 2012, the Company determined it would not have any significant continuing involvement in the operations of the asset group after the disposal date and, therefore, reclassified for all periods presented the operations and the gain on sale of the land and building as discontinued operations.

In connection with the Company’s sale of its office and manufacturing facility and improvements to Nortech, the Company entered into a month-to-month lease agreement with Nortech for the lease of 1,900 square feet of office space at $5.25 per square foot.

Amounts included in discontinued operations for the years ended December 31, 2013 and 2012 were as follows:

		Year ended December 31,
(in thousands)		2013				2012
Net sales		$	-			$	-
Gross profit (loss)			-				-
Income from discontinued operations (1)			-				655

(1)

2012 includes gain on sale of land and building of $506

 

There was no income tax expense or benefit from discontinued operations for either year ended December 31, 2013 or 2012.

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Note 7.  Commitments and Contingencies

On September 11, 2013, the Company entered in to a twelve month lease for office space at 100 North Sixth Street, Suite 604A, Minneapolis, MN with a commencement date of October 1, 2013.  The office was used for the Company’s sales and marketing, product management and executive staff.  The lease was cancelled on December 31, 2013 with the Company incurring $44 of cancellation expense which was included in general and administrative expense for the year ended December 31, 2013.  No further obligations associated with this lease exist as of December 31, 2013.

 

Rent expense of $102 and $11 for the years ended December 31, 2013 and 2012, respectively is included in general and administrative expenses.

Note 8.  Employee Benefit Plans

Health Savings Account:  Winland has a health savings account plan for its employees who meet certain service requirements.  The plan provides for Winland to make contributions equal to one-half the deductible limit elected by the employee.  The employee may also make contributions equal to one-half the deductible limit elected.  Winland makes contributions to the plan on a quarterly basis on the first day of each quarter.  The contributions cannot be refunded to Winland if the employee’s employment with Winland is terminated voluntarily or involuntarily.  Winland contributed approximately $18 and $13 to the plan for the years ended December 31, 2013 and 2012, respectively.

Winland had customers which accounted for more than 10 percent of net sales and accounts receivable for the years ended December 31, 2013 and 2012, as follows:

	2013		2012
Sales percentage:
Customer A	50%		52%
Customer B	12%		10%
Accounts receivable percentage at December 31:
Customer A	55%		56%
Customer B	21%		16%

On February 27, 2014, the Company entered into a Section 382 Rights Agreement with its transfer agent Registrar and Transfer Company, dated as of February 27, 2014 (the “382 Rights Agreement”).  The purpose of the 382 Rights Agreement is to help protect the Company’s net operating loss tax asset by deterring certain acquisitions of Company stock by persons or groups beneficially owning 5% or more of the Company’s outstanding stock, which could have the effect of limiting the Company’s ability to use its built in losses and any resulting net loss carry forwards to reduce potential future federal income tax obligations.  The Company’s ability to use its net loss carry forwards in the future may be significantly limited if it experiences an “ownership change” for U.S. federal income tax purposes. In general, an ownership change will occur when the percentage of the Company’s ownership (by value) of one or more “5 percent shareholders” (as defined in the Internal Revenue Code of 1986, as amended) has increased by more than 50 percent over the lowest percentage owned by such shareholders at any time during the prior three years (calculated on a rolling basis).

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Under the 382 Rights Agreement, from and after the record date of March 10, 2014 (the “Record Date”), each share of Company Common Stock will carry with it one preferred share purchase right (a “Right”).   In connection with adoption of the Section 382 Rights Agreement, the Board declared a dividend distribution of the Rights to shareholders of record on the Record Date.  Each Right will allow its holder to purchase from the Company one one-thousandth of a share of Series B Junior Participating Preferred Stock for $14.00 (the “Exercise Price”).  The Rights will not be exercisable until 10 days after the public announcement that a person or group has become an “Acquiring Person” by obtaining beneficial ownership of 4.99% or more of the Company’s outstanding Common Stock, or by the future acquisition of any shares of Company common stock by any person or group who held 4.99% or more of the Company’s outstanding common stock as of the date the 382 Rights Agreement was adopted.  If a person or group becomes an Acquiring Person, all holders of Rights except the Acquiring Person may, for payment of the Exercise Price, purchase shares of Common Stock with a market value of twice the Exercise Price, based on the market price of the Common Stock as of the acquisition that resulted in such person or group becoming an Acquiring Person.  Prior to exercise, the Right does not give its holder any dividend, voting, or liquidation rights.  The Rights will expire on March 10, 2019 and are redeemable by the Board for $0.000001 per Right at any time prior to a person or group becoming an Acquiring Person.  The Board has discretion under the 382 Rights Agreement to exempt any person or group from status as an Acquiring Person if the Board determines such person or group’s acquisition will not limit the Company’s use of its net loss carry forwards.  The Company previously had a Shareholder Rights Plan, the Rights under which expired on December 9, 2013.

On January 1, 2011, the Company agreed to terminate the employment relationships of its then Chief Executive Officer and Chief Financial Officer.  Pursuant to the separation agreements, the Company agreed to pay salaries due to the former executives totaling $358.  The agreements call for the amounts to be paid at regular payroll intervals over the term of the agreement.  The final $43 of severance payments associated with these separation agreements were made in the first quarter of 2012.

On November 15, 2013, the Company agreed to terminate the employment relationship of its then Chief Executive Officer.  Pursuant to the separation agreement, the Company agreed to pay a lump sum to the former executive totaling $200 which is included in general and administrative expense.

On November 15, 2013, the Company agreed to terminate the employment relationship of its then Vice President of Marketing.  Pursuant to the separation agreement, the Company agreed to pay salaries due to the former employee totaling $34 which is included in sales and marketing expense.  The agreement calls for the amount to be paid at regular payroll intervals over the term of the agreement.  The accrual for severance was included in Accrued Liabilities:  Compensation on the balance sheet at December 31, 2013.

 

On December 27, 2013, the Company agreed to terminate the employment relationship of its then Chief Information Officer.  Pursuant to the separation agreement, the Company agreed to pay salaries due to the former employee totaling $79 which is included in research and development expense.  The agreement calls for the amount to be paid at regular payroll intervals over the term of the agreement.  The accrual for severance was included in Accrued Liabilities:  Compensation on the balance sheet at December 31, 2013.

 

The following table provides financial information on the employee severance expense payable at December 31, 2013 and 2012.

 

		December 31, 2011				Net Additions				Payments				December 31, 2012
Employee Severance Expense		$	43			$	-			$	(43	)		$	-
		December 31, 2012				Net Additions				Payments				December 31, 2013
Employee Severance Expense		$	-			$	313			$	(208	)		$	105

 

The $105 of severance expense payable will be paid out during the first five months of 2014.

 

As part of the Company’s employment agreement with its Chief Financial Officer, if such executive officer is terminated without cause, severance payments may be due to such executive officer.

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Name of Director/Nominee	Age	Current Position With Winland Electronics, Inc.	Director  Since
Brian D. Lawrence	43	Chief Financial Officer and Senior Vice President
Lorin E. Krueger	58	Director	1983
Thomas J. Goodmanson	44	Director	2007
Thomas J. Brady	49	Director	2008
Thomas Braziel	29	Director	2013
Matthew D. Houk	32	Director	2013

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Name  and Principal Position	Year		Salary ($)				Severance ($)(2)				Total ($)
David A. Gagne(1)	2013		$	208,655			$	200,000			$	408,655
Chief Executive Officer	2012		$	12,308			$	0			$	12,308
Brian D. Lawrence	2013		$	127,699			$	0			$	127,699
Chief Financial Officer	2012		$	139,145			$	0			$	139,145

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Name		Number of Securities Underlying Unexercised Options (#) Exercisable				Number of Securities Underlying Unexercised Options (#) Un-exercisable				Option Exercise Price ($)			Option Expiration Date
David A. Gagne			50,000(1)				0			$	0.58		07/23/2017
Brian D. Lawrence			0				50,000(2)			$	0.65		01/28/2023

 

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Name		Fees Earned or Paid in Cash ($)				Restricted Stock Awards ($)(1)				Total ($)				Options to purchase shares of common stock (#)(2)
Thomas J. Goodmanson		$	19,000			$	12,000			$	31,000				62,000
Thomas J. Brady		$	19,000			$	12,000			$	31,000				62,000
Lorin E. Krueger		$	17,000			$	12,000			$	29,000				46,500
Thomas Braziel		$	12,000			$	12,000			$	24,000				0
Matthew D. Houk		$	12,000			$	12,000			$	24,000				0

Name (and Address of 5% Owner) or Identity of Group		Number of Shares Beneficially Owned(1)				Percent of Class (1)
Thomas Braziel			466,940	(2)			12.3	%
Karen M. Hirschmann			346,793	(3)			9.2	%
Brian B. Hirschmann			341,320	(4)			9.0	%
Matthew D. Houk			292,205	(5)			7.7	%
David B. Houk			191,005	(6)			5.0	%
Lorin E. Krueger			137,679	(7)			3.6	%
Thomas J. Goodmanson			96,143	(8)			2.5	%
Thomas J. Brady			91,143	(9)			2.4	%
Brian D. Lawrence			0				0	%
All Executive Officers and Directors as a Group (6 Individuals)			1,084,110	(10)			27.4	%

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(1)

Under the rules of the SEC, shares not actually outstanding are deemed to be beneficially owned by an individual if such individual has the right to acquire the shares within 60 days.  Pursuant to such SEC Rules, shares deemed beneficially owned by virtue of an individual’s right to acquire them are also treated as outstanding when calculating the percent of the class owned by such individual and when determining the percent owned by any group in which the individual is included.

 

(2)

According to a Schedule 13D/A filed with the Securities and Exchange Commission on December 19, 2013 by BE Capital Management LP, BE Capital Partners LLC, Thomas Braziel and David Earls, the shares are beneficially owned by Mr. Braziel who has sole power to vote or to dispose of such shares.  The address for BE Capital Partners LLC is 211 East 70th Street, Apt 10F, New York, NY, 10021.

 

(3)

According to a Schedule 13D filed with the Securities and Exchange Commission on January 21, 2014 by Karen M. Hirschmann, the shares are beneficially owned by Ms. Hirschmann who has sole power to vote or to dispose of such shares.  The address for Karen M. Hirschmann is 515 S Figueroa St, Suite 1975, Los Angeles, CA, 90071.

 

(4)

According to a Schedule 13Dfiled with the Securities and Exchange Commission on April 16, 2013 by Brian B. Hirschmann, the shares are beneficially owned by Mr. Hirschmann who has sole power to vote or to dispose of such shares.  The address for Brian B. Hirschmann is 725 S Figueroa St, 39th Floor, Los Angeles, CA, 90017.

 

(5)

According to a Schedule 13D filed with the Securities and Exchange Commission on February 11, 2013 by Matthew D. Houk, the shares are beneficially owned by Mr. Houk who has sole power to vote or to dispose of such shares.  The address for Matthew D. Houk is c/o Horizon Kinetics LLC, 470 Park Avenue South, 4th Floor, New York, New York 10016.

		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
		(a)				(b)				(c)
Equity compensation plans approved by security holders			300,500			$	0.78				320,000
Equity compensation plan not approved by security holders (1)			2,500			$	4.01				0
TOTALS			303,000			$	0.81				320,000

(1) The plan consists of a warrant agreement to purchase shares of Winland’s Common Stock issued in 2006 as partial consideration for consulting services to Board Assets, Inc., a board evaluation and consulting firm.  Warrant to purchase 5,000 shares of common stock, which warrant vests upon performance of certain services and expires on February 16, 2016 (2,500 shares vested on July 17, 2006, and the remaining shares did not vest because the consulting arrangement has been terminated).

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		Fiscal Year Ended December 31
		2013				2012
Audit fees		$	52,575			$	60,054
Audit related fees			2,350				-
		$	54,925			$	60,054

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	Winland Electronics, Inc.
Dated:  February 27, 2014	/s/ Brian D. Lawrence
	Brian D. Lawrence
	Chief Financial Officer

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Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of Winland, in the capacities, and on the dates, indicated.

 

Signature and Title	Date
/s/ Brian D. Lawrence	February 27, 2014
Brian D. Lawrence
Chief Financial Officer and Senior Vice President
(Principal Financial Officer)
/s/ Thomas J. Goodmanson	February 27, 2014
Thomas J. Goodmanson
Director
/s/ Thomas J. Brady	February 27, 2014
Thomas J. Brady
Director
/s/ Lorin E. Krueger	February 27, 2014
Lorin E. Krueger
Director
/s/ Thomas Braziel	February 27, 2014
Thomas Braziel
Director
/s/ Matthew D. Houk	February 27, 2014
Matthew D. Houk
Director

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For the Fiscal Year Ended December 31, 2013

Commission File No.:  1-15637

 

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Exhibit Number	Item
10.8	Separation Agreement between the Company and Glenn A. Kermes dated December 28, 2010 (Incorporated by reference to Exhibit 10.49 to Form 10-K for year ended December 31, 2010) **
10.9	Commercial Building Lease between the Company and Nortech Systems, Incorporated dated January 1, 2011 (Incorporated by reference to Exhibit 10.50 to Form 10-K for year ended December 31, 2010)
10.10	Sublease Agreement between the Company and Nortech Systems, Incorporated dated January 1, 2011 (Incorporated by reference to Exhibit 10.51 to Form 10-K for year ended December 31, 2010)
10.11	Manufacturing Agreement between the Company and Nortech Systems, Incorporated dated January 1, 2011 (Incorporated by reference to Exhibit 10.52 to Form 10-K for year ended December 31, 2010)
10.12	Retention Agreement between the Company and Brian D. Lawrence dated July 29, 2011 (Incorporated by reference to Exhibit 10.1 to Form 8-K dated July 29, 2011 and filed on August 4, 2011)**
10.13	Manufacturing Agreement between the Company and Nortech Systems, Incorporated dated December 27, 2011 (Incorporated by reference to Exhibit 10.1 to Form 8-K dated December 27, 2011 and filed on December 30, 2011)
10.14	Sublease Agreement between the Company and Nortech Systems, Incorporated dated December 28, 2011 (Incorporated by reference to Exhibit 10.43 to Form 10-K for year ended December 31, 2011)
10.15	Employment Agreement dated November 30, 2012 between the Company and David Gagne (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated December 6, 2012) **
10.16	Employment Agreement dated January 28, 2013 between the Company and Brian D. Lawrence (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated February 1, 2013) **
10.17	Amendment to Employment Agreement dated November 30, 2012 between the Company and David A. Gagne (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K dated February 1, 2013) **
10.18	Building Purchase Agreement between the Company and Nortech Systems, Incorporated dated November 27, 2012
10.19	Commercial Lease Agreement between the Company and Nortech Systems, Incorporated dated December 31, 2012
10.20*	Separation Agreement between the Company and David A. Gagne dated November 15, 2013. **
23.1*	Consent of Baker Tilly Virchow Krause, LLP
24.1*	Power of Attorney for Brian D. Lawrence, Thomas J. Goodmanson, Thomas J. Brady, Lorin E. Krueger, Thomas Braziel, Matthew D. Houk  (included on signature page of this Form 10-K)
31.1*	Certification of Chief Financial Officer and Senior Vice President Pursuant to Section 302 of the Sarbanes-Oxley Act
32.1*	Certification of Chief Financial Officer and Senior Vice President Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document

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*  Filed herewith.

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