WINLAND ELECTRONICS INC (Form: 10-K, Received: 03/22/2013 13:53:08)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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, 2012

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:

Title of Each Class		Name of Exchange
Common Stock, $.01 par value		OTCQB Market
Preferred Stock Purchase Rights		OTCQB Market

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No þ

Indicate by check mark whether the registrant (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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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. o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the Common Stock held by non-affiliates as of June 30, 2012 was $2,620,331 based on the closing sale price of the Issuer’s Common Stock on such date.

There were 3,701,630 shares of Common Stock, $.01 par value, outstanding as of March 15, 2013.

TABLE OF CONTENTS

			PAGE
PART I
	ITEM 1.	DESCRIPTION OF BUSINESS.	3
	ITEM 1A.	RISK FACTORS.	4 - 7
	ITEM 1B.	UNRESOLVED STAFF COMMENTS.	7
	ITEM 2.	DESCRIPTION OF PROPERTY.	7 - 8
	ITEM 3.	LEGAL PROCEEDINGS.	8
	ITEM 4.	MINE SAFETY DISCLOSURES	8
PART II
	ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.	8
	ITEM 6.	SELECTED FINANCIAL DATA.	9
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.	9 - 13
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	13
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.	14 - 32
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.	33
	ITEM 9A.	CONTROLS AND PROCEDURES.	33 - 34
	ITEM 9B.	OTHER INFORMATION.	34
PART III
	ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.	34
	ITEM 11.	EXECUTIVE COMPENSATION.	34
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.	34 - 35
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.	36
	ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES.	36
	ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	36
SIGNATURES			37 - 38
EXHIBIT INDEX			39 - 41
Certification of Chief Executive Officer Pursuant to Section 302			42
Certification of Chief Financial Officer and Senior Vice President Pursuant to Section 302			43
Certification of Chief Executive Officer Pursuant to Section 906			44
Certification of Chief Financial Officer and Senior Vice President Pursuant to Section 906			45

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PART I

ITEM 1.

DESCRIPTION OF BUSINESS

General

Winland Electronics, Inc. (“Winland”, “Company”, “we” or “our”) was incorporated as a Minnesota corporation in October 1972. Through distribution to dealers and integrators, Winland provides a line of proprietary critical condition 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 2012 and 2011. Prior to January 1, 2011, we also designed and manufactured custom electronic controls and assemblies primarily for original equipment manufacturer (“OEM”) customers, providing services from early concept studies through complete product realization (Electronic Manufacturing Services (EMS) business). On January 1, 2011, we sold our EMS business unit to an unrelated third party, Nortech Systems, Incorporated (Nortech) (see Note 7 of our financial statements). As a result, we classified our EMS business as a discontinued operation for 2012 and 2011. In addition, we sold our land and building (asset group) on December 31, 2012 and also classified the related operations as discontinued operations for 2012 and 2011. All references contained herein relate to our continuing operations of our proprietary business unless identified as discontinued operations.

Sales and Distribution

Winland markets and sells its line of proprietary critical condition monitoring products primarily through an established network of distributors, dealers, security installers and integrators. Winland employs full-time sales professionals and has engaged independent manufacturers’ sales representative organizations who are responsible for territory-based commissioned sales. This distribution network is primarily located in the United States.

Competition

Competition among the security industry has increased in the last several years as additional companies have introduced competing products. Significant competitive factors in the market for security products include product effectiveness and features, price, reliability and company reputation. Winland believes that it competes favorably with respect to product effectiveness, features, price and reliability. However, given its size and relatively small presence in this market, many of Winland’s competitors have an advantage by being larger, better-known and better-financed.

Source of Goods Available for Sale

Winland has a contract with a single third party contract manufacturer through December 31, 2013 to produce goods held for sale to the Company’s customers. These assemblies are manufactured to design specifications furnished by Winland. Alternative sources are available should the Company’s existing source be unable to perform.

Significant Customers

Approximately 52% and 50% of the Company’s Proprietary Products sales in 2012 and 2011, respectively were to one of the world’s largest distributors of security products. Winland derived approximately 12% and 4% of its revenues from sales outside the United States for the years ended December 31, 2012 and 2011, respectively.

Patents, Trademarks and Licenses

Winland holds federal trademark registrations for marks used in its business as follows: WATERBUG, TEMP ALERT and ENVIROALERT.

Personnel

At December 31, 2012, Winland had nine full time employees. During 2012 and 2011, Winland also used temporary labor services. Winland is not subject to a collective bargaining agreement and considers its relations with its employees to be good.

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ITEM 1A.

RISK FACTORS

Based on current and known information, we believe that the following identifies the most significant risk factors that could affect our business. However, the risks and uncertainties we face are not limited to those discussed below. There could be other unknown or unpredictable economic, business, competitive or regulatory factors, including factors that we currently believe to be immaterial, that could in fact have material adverse effects on our financial position, liquidity, and results of operations. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

You should consider the following risk factors, in addition to other information presented or incorporated by reference into this Annual Report on Form 10-K in evaluating our business and your investment in us.

We are dependent on a small number of customers and such customer’s response to the current uncertain economic conditions.

Our Proprietary Products sales are dependent on a small number of security products distributors with the top five distributors together representing over 65% of our total sales in both 2012 and 2011. We do not obtain firm, long-term purchase commitments from our customers. Customers may also cancel their orders, change quantities, or delay delivery for a number of reasons. Cancellations, reductions, or delays by a significant customer or by a group of customers may harm our results of operations by reducing the volumes of products sold.

We outsource the manufacturing of our line of Proprietary Products.

We have an agreement with an outside contract manufacturing firm to manufacture our proprietary products through December 31, 2013. Based on the agreement, we issue purchase orders with definitive quantities, delivery dates and price. We cannot guarantee the ability of the manufacturer to timely deliver against the purchase orders which may cause us to experience delays in meeting our customer’s delivery requirements. If experienced, these delays may impact sales volumes and increase costs.

Our operating results may vary significantly from period to period.

We experience fluctuations in our operating results. Some of the principal factors that contribute to these fluctuations are our effectiveness in managing inventory levels; changes in the cost and availability of finished goods purchased from our manufacturer; and changes in demand for our products. Results of operations in any period, therefore, should not be considered indicative of the results to be expected for any future period.

Market acceptance of our new EA800-ip product and our pricing of such product is uncertain, and we may be unable to obtain market acceptance of our EA800-ip product at the price we hope for.

The success of our EA800-ip product will depend upon the acceptance by customers of our EA800-ip product as equivalent as or better than the current product or solution they are currently using for security products. Our future success will depend on our receiving market acceptance of the EA800-ip product at a price that is acceptable to us. Market acceptance of our EA800-ip product will depend on a number of factors, including:

●

the perceived effectiveness of our EA800-ip product relative to its cost;

●

the potential advantages of our EA800-ip product over alternative products;

●

the development of new products and technologies by our competitors or new alternative security products; and

●

the effectiveness of our sales and marketing efforts.

If our EA800-ip product does not achieve adequate acceptance by our customers and potential customers, we may not generate our projected revenue and our business would be materially impacted.

Our strategic growth plan depends substantially on customers renewing, upgrading and expanding their subscriptions for our services.

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Pursuant to our new strategic growth plan we intend to become a Software as a Service (“SaaS”) business model. As a result, our ability to grow is dependent in part on customers purchasing subscriptions and modules. We have limited historical data with respect to rates of customer subscription renewals, upgrades and expansions so we may not accurately predict future trends in customer renewals. Our customers’ renewal rates may decline or fluctuate because of several factors, including their satisfaction or dissatisfaction with our services, the prices of our services, the prices of services offered by our competitors or reductions in our customers’ spending levels due to the macroeconomic environment or other factors. If our customers do not purchase subscriptions for our services, renew on less favorable terms, or do not purchase additional functionality or subscriptions, our revenue may grow more slowly than expected or decline and our profitability and gross margin may be harmed.

The market for SaaS business applications may develop more slowly than we expect.

Our success will depend, to a large extent, on the willingness of businesses to accept cloud-based SaaS services for applications that they view as critical to the success of their business. Many companies have invested substantial effort and financial resources to integrate traditional enterprise software into their businesses and may be reluctant or unwilling to switch to a different application or to migrate these applications to cloud-based services. Other factors that may affect market acceptance of our application include:

●

the security capabilities, reliability and availability of cloud-based services;

●

customer concerns with entrusting a third party to store and manage their data, especially confidential or sensitive data;

●

our ability to maintain high levels of customer satisfaction;

●

our ability to implement upgrades and other changes to our software without disrupting our service;

●

the level of customization or configuration we offer; and

●

the price, performance and availability of competing products and services.

Many of our customers are price sensitive, and if the prices we charge for our services are unacceptable to our customers, our operating results will be harmed.

Many of our customers are price sensitive, and we have limited experience with respect to determining the appropriate prices for our services. As the market for our services matures, or as new competitors introduce new products or services that compete with ours, we may be unable to renew our agreements with existing customers or attract new customers at the same price or based on the same pricing model as previously used. As a result, it is possible that competitive dynamics in our market may require us to change our pricing model or reduce our prices, which could harm our revenue, gross margin and operating results.

We rely on our management team and need additional personnel to grow our business, and the loss of one or more key employees or our inability to attract and retain qualified personnel could harm our business.

Our success and future growth depends to a significant degree on the skills and continued services of our management team, especially David Gagne, our Chief Executive Officer, and Brian Lawrence, our Chief Financial Officer. Our future success also depends on our ability to attract, retain and motivate highly skilled technical, managerial, sales, marketing and service and support personnel, including members of our management team. Competition for sales, marketing and technology development personnel is particularly intense in the technology industries. As a result, we may be unable to successfully attract or retain qualified personnel. Our inability to attract and retain the necessary personnel could harm our business.

If we fail to manage our SaaS hosting network infrastructure capacity, our existing customers may experience service outages and our new customers may experience delays in the deployment of our SaaS products.

We seek to maintain sufficient excess capacity in our SaaS hosting network infrastructure to meet the needs of all of our customers. If we do not accurately predict our infrastructure capacity requirements, our customers could experience service outages that may result in customer losses. If our hosting infrastructure capacity fails to keep pace with increased sales, customers may experience delays as we seek to obtain additional capacity, which could harm our reputation and adversely affect our revenue growth.

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If we fail to develop our brand cost-effectively, our business may suffer.

We believe that developing and maintaining awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our existing and future solutions and is an important element in attracting new customers. Furthermore, we believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful services at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.

We may experience delays in product and service development, including delays beyond our control, which could prevent us from achieving our growth objectives and hurt our business.

Many of the problems, delays and expenses we may encounter may be beyond our control. Such problems may include, but are not limited to, problems related to the technical development of our products and services, the competitive environment in which we operate, marketing problems, consumer and advertiser acceptance and costs and expenses that may exceed current estimates. Problems, delays or expenses in any of these areas could have a negative impact on our business, financial conditions or results of operations.

Delays in the timely design, development, deployment and commercial operation of our EA800-ip product and service offerings, and consequently the achievement of our revenue targets and positive cash flow, could result from a variety of causes, including many causes that are beyond our control.

We might require additional capital to support our strategic growth plan, and this capital might not be available on acceptable terms, if at all.

We intend to continue to make investments to support our strategic growth plan and may require additional funds to respond to business challenges, including the need to develop new solutions or enhance our existing solutions, enhance our operating infrastructure and update our product. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and our business, operating results, financial condition and prospects could be adversely affected.

We may be unsuccessful against future competitors. If we do not compete effectively, our operating results and future growth could be harmed.

We may encounter growing competition in our business from many sources. Many of our future competitors may have substantially greater financial, marketing, technological and other resources than we do. Some of these companies may even choose to offer services competitive with ours at no cost as a strategy to attract or retain customers of their other services. If we are unable to compete successfully with traditional and other emerging providers of competing services, our business, financial condition and results of operations could be adversely affected.

Demand for our services is sensitive to price. Many factors, including our advertising, customer acquisition and technology costs, and our current and future competitors’ pricing and marketing strategies, can significantly affect our pricing strategies. There can be no assurance that we will not be forced to engage in price-cutting initiatives, or to increase our advertising and other expenses to attract and retain customers in response to competitive pressures, either of which could have a material adverse effect on our revenue, operating results and resources.

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In the event we are unable to retain existing proprietary product customers or to grow our SaaS customer base by adding new customers, our operating results will be adversely affected.

Our strategic growth plan is in part driven by our ability to retain our existing customers and grow our customer base by adding new SaaS customers. Customers cancel their accounts for many reasons, including economic concerns, business failure or a perception that they do not use our product effectively and the perception that the service is not a good value. In some cases, we terminate an account because the customer fails to comply with our standard terms and conditions. As our customer base continues to grow, even if our customer retention rates remain the same on a percentage basis, the absolute number of customers we lose each month will increase. We must continually add new customers to replace customers whose accounts are cancelled or terminated, which may involve significantly higher marketing expenditures than we currently anticipate. If too many of our historical proprietary product customers cancel our service, or if we are unable to attract new SaaS customers in numbers sufficient to grow our business, our operating results would be adversely affected.

Our business could be adversely affected if our clients are not satisfied with our SaaS solutions, our implementation and integration of our solutions or our professional services.

The success of our strategic growth plan will depend on our ability to satisfy our clients and meet their business needs. If a client is unsatisfied, we could lose the client, we could incur additional costs to remedy the situation, or the profitability of our relationship with that client may be impaired. Negative publicity resulting from issues related to our client relationships, regardless of accuracy, may damage our business by adversely affecting our ability to attract new clients and maintain and expand our relationships with existing clients.

Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations.

We require effective internal control over financial reporting in order to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurances with respect to the preparation and fair presentation of financial statements.

Our common stock was recently delisted from the NYSE Amex Exchange and investors may have difficulty trading and obtaining quotations for our common stock, which could impair their investments and our business.

On April 11, 2012 we received a notice from NYSE Amex LLC indicating that we were not in compliance with the continued listing requirements due to: our having stockholders’ equity of less than $4,000,000 and losses from continuing operations and/or net losses in three of our four most recent fiscal years, as set forth in Section 1003(a)(ii) of the NYSE Amex Exchange’s Corporate Guide; and stockholders’ equity of less than $6,000,000 and losses from continuing operations and/or net losses in our five most recent fiscal years ended December 31, 2011, as set forth in Section 1003(a)(iii) of the NYSE Amex Exchange’s Company Guide.

Despite our diligent efforts to meet the requirements of the NYSE Amex Exchange, On March 6, 2013 we were informed by the NYSE Amex Exchange that our common stock would be delisted. Our common stock was immediately eligible for quotation on the OTC Bulletin Board and began trading on the OTC Bulletin Board as of the open of business on March 21, 2013. The OTC Bulletin Board symbol of our common stock is WELX.

Because our common stock was delisted from the NYSE Amex Exchange, the liquidity of our common stock will be impaired and access to the capital markets, if necessary, may not be possible. An investor may find it difficult to dispose of, or to obtain accurate quotations of the price of, shares of our common stock. The lack of an established trading market severely limits the liquidity of our common stock, and could depress the market price of our common stock and limit our ability to raise additional capital.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

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ITEM 2.

DESCRIPTION OF PROPERTY

On December 31, 2012, the Company sold its manufacturing facility to Nortech Systems, Inc. (“Nortech”), the then current lessee of the property for $2,650,000. The building and land had a carrying cost of $2,135,000, resulting in a gain of $506,000, after deducting expenses related to the sale of $9,000. Rental revenue for the year ended December 31, 2012, was $261,000, reduced by $218,000 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 $106,000 related to the remaining unamortized deferred revenue associated with the tax increment financing associated with the facility.

On December 31, 2012, Winland entered in to a month-to-month lease with Nortech to lease 1,924 square feet of office space at 1950 Excel Drive, Mankato, MN, the Company’s prior manufacturing facility. This office space is used for the Company’s operations including customer service, technical support and finance.

In December 2012, Winland entered in to a twelve month lease agreement for office space at 601 Carlson Parkway, Suite 1050, Minnetonka, MN. This office space is used for the Company’s sales and marketing, product management and executive staff.

ITEM 3.

LEGAL PROCEEDINGS

None.

ITEM 4.

MINE SAFETY DISCLOSURES

None.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Winland’s Common Stock is listed on the OTCQB Market under the symbol WELX. Prior to March 21, 2013, Winland's common stock was listed on the NYSE Amex under the symbol WEX. The following table sets forth the high and the low market closes, as reported by NYSE Amex during 2012 and 2011.

Fiscal Year Ended December 31, 2012	Low		High
First Quarter	$	0.44	$	0.88
Second Quarter	$	0.47	$	0.80
Third Quarter	$	0.40	$	0.67
Fourth Quarter	$	0.43	$	0.85

Fiscal Year Ended December 31, 2011	Low		High
First Quarter	$	0.71	$	0.90
Second Quarter	$	0.62	$	0.76
Third Quarter	$	0.58	$	0.69
Fourth Quarter	$	0.30	$	0.60

On March 15, 2013, the fair market value of Winland’s Common Stock was $0.81 based on the closing sale price quoted by NYSE Amex on that date. As of December 31, 2012, Winland had 370 registered shareholders of record. Winland has never paid cash dividends on its Common Stock. The Board of Directors presently intends to retain any earnings for use in its business and does not anticipate paying cash dividends on Common Stock in the foreseeable future. The payment of cash dividends in the future, if any, will be at the discretion of the Board of Directors and will depend on such factors as earnings levels, capital requirements, Winland's overall financial condition and any other factors deemed relevant by Winland's Board of Directors.

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ITEM 6:

SELECTED FINANCIAL DATA

None.

ITEM 7:

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

EXECUTIVE SUMMARY

Winland Electronics is a leader in designing and selling critical environmental monitoring solutions. We sell our solutions to customers around the world through a channel of distributors and security systems integrators.

Our solutions assist customers by helping them to: reduce product loss, comply with various regulations, reduce labor costs and potentially mitigate costly litigation.

Our solutions include:

The EnviroAlert (EA) product line which now represents over 50% of our revenue. The EA product line offers industrial, commercial and residential users the flexibility to simultaneously monitor temperature, humidity, water, gases, pressure and dry contacts in one or more critical environments. This product line includes our recently introduced EA800-ip solution, an industry-leading monitoring system that via software provides two-way access for users to remotely monitor, collect and view real-time data from up to eight sensors. Users can also modify their sensor settings via a wireless connection that eliminates the need for on-site adjustments or service calls.

The WaterBug Alert, which is designed for dependable water detection.

The TempAlert solution delivers reliable and economical temperature detection for residential or commercial security systems.

Our HumidAlert solution monitors humidity and is ideal for any areas where too much moisture, or not enough, can damage commercial and residential property.

Our Vehicle-Alert allows users to know when a vehicle enters a driveway or comes to a business drive up window.

Key markets that we sell our solution into include the distribution and retail segments of the food, healthcare and drug industries.

RESULTS OF OPERATIONS – 2012 vs. 2011

The Company reported net income of $21,000 or $0.01 per basic and diluted share for the year ended December 31, 2012 compared to the $740,000 net loss or $0.20 loss per basic and diluted share for the same period in 2011.

Net Sales

Net sales for the year ended December 31, 2012 were $3,713,000 up $269,000 or 7.8% compared to the same period in 2011 driven by a 14.2% increase in sales to Winland’s largest distributor.

Operating Loss

The Company reported an operating loss of $644,000 and $1,023,000 for the years ended December 31, 2012 and 2011, respectively. The Company’s gross margin percentage of 29.4% in 2012 was up from 27.6% reported in 2011. Increased gross margins were the result of a favorable product sales mix and overall price increases implemented for 2012.

For the year ended December 31, 2012, general and administrative expenses were $762,000 down from $852,000 from the same period in 2011. The decline in expense was related to decreased depreciation expense of $73,000 primarily for the Company’s building and land assets sold on December 31, 2012. The Company recorded depreciation expense in 2011 until the time the building met the criteria to be classified as held for sale in September 2011. Additionally, the decline in expense was related to reduced borrowing line fees of $50,000, reduced salaries and wages expenses of $46,000 related to stay bonus payments made in 2011, reduced board of director fees of $39,000 based on the revised board retainer and committee fees approved on May 24, 2011, partially offset by increased consulting expenses of $119,000 related to the strategic business project conducted in 2012 and increased professional fees of $23,000 including audit, legal and tax preparation expenses.

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For the year ended December 31, 2012, sales and marketing expenses were $688,000, a decrease of $195,000 from the same period in 2011. The decrease was due to reduced salaries and commission expenses of $93,000, reduced advertising and trade show expenses of $61,000 and reduced expenditures for travel of $37,000.

During 2012, the Company funded research and development activities, incurring expenses of $285,000 which were primarily for new product development of $182,000 related to the Company’s EnviroAlert EA800-ip product and salary and benefit expenses of $78,000. During 2011, the Company funded research and development activities, incurring expenses of $237,000 which were primarily for new product development of $168,000 related to the Company’s EnviroAlert EA800-ip product and salary and benefit expenses of $59,000.

In January 2013, the Company announced its strategic growth plan to become a leading provider of real-time, cloud-based environmental monitoring solutions by implementing a Software as a Service (SaaS) business model. This plan calls for investments of approximately $1,200,000 in additional sales, marketing and channel management resources and development of the Company’s SaaS platform.

Other Income and Expense

Other income and expense consists primarily of interest expense and other, net. The Company did not borrow money during the year ended December 31, 2012 and therefore had no interest expense. Interest expense for the year ended December 31, 2011 was $54,000 which consisted of $29,000 mortgage interest paid to US Bank, $22,000 paid to TCI for interest and minimum fees for terminating the financing agreement in April 2011 and $3,000 paid to PrinSource for factoring of accounts receivable. For 2011, the Company received $11,000 in interest income from the settlement and payment of refunds related to the settlement reached between the Company and the Internal Revenue Service regarding research and development tax credits.

Income Tax

Winland 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, 2012 and 2011 was $1,853,000 and $1,889,000, respectively. The net change in the total valuation allowance for the years ended December 31, 2012 and 2011 was an increase (decrease) of ($36,000) and $296,000, respectively. The tax effect of the Company’s valuation allowance for deferred tax assets is included in the annual effective tax rate. As of December 31, 2012 and 2011, the Company calculated its estimated annualized effective tax expense (benefit) rate at 0% and 1%, respectively. The Company had no income tax expense based on its $634,000 pre-tax loss from continuing operations for the year ended 2012. The Company recognized income tax expense of $9,000 (net of the valuation allowance) based on its $1,051,000 pre-tax loss from continuing operations for year ended 2011.

Gain from discontinued operations

On December 31, 2012, the Company sold its manufacturing facility to Nortech, the then current lessee of the property for $2,650,000. The building and land had a carrying cost of $2,135,000, resulting in a gain of $506,000, after deducting expenses related to the sale of $9,000. Rental revenue for the year ended December 31, 2012, was $261,000, reduced by $218,000 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 $106,000 related to the remaining unamortized deferred revenue associated with the tax increment financing associated with the facility.

On January 1, 2011, the Company sold its EMS business to Nortech. Winland recognized a gain from discontinued operations, net of tax, of $59,000 for the year ended December 31, 2011. The gain was the result of additional inventory sales to Nortech above the $2,200,000 commitment which allowed the Company to reduce the reserve for obsolescence for inventory held for discontinued operations by $73,000. Net sales from discontinued operations for the year ended December 31, 2011 were $2,906,000 from raw, finished and work-in-process inventories sold to Nortech. The Company had no gross profit on the inventory sold to Nortech for the year ended December 31, 2011, as the Company sold inventory to Nortech at historical cost. The Company also recorded rental revenue of $261,000 and amortization of deferred revenue of $8,000 for the year ended December 31, 2011 related to its manufacturing facility.

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LIQUIDITY AND CAPITAL RESOURCES

Operating activities used cash of $634,000 for the year ended December 31, 2012 which resulted from a $506,000 non-cash gain on the sale of building, a net increase in finished goods inventories of $317,000 for future customer sales, a $106,000 reduction in deferred revenue for the reversal of tax increment financing related to the building and reduced payroll related expenses of $50,000 for the payment of accrued bonuses and severance partially offset by reduced deferred rent receivable of $261,000 and increased accounts payable balances of $82,000 for purchases of finished goods inventory. Operating activities used cash of $1,505,000 for the year ended December 31, 2011 which resulted from the net loss of $740,000, a net increase in finished goods inventories of $455,000 for future customer sales, a reduction of accrued expenses of $421,000 primarily related to compensation payments of $339,000 partially offset by federal and state income tax refunds received of $277,000.

Investing activities used cash of $7,000 for equipment purchases for the year ended December 31, 2012. For the year ended December 31, 2011, investing activities provided cash of $3,913,000 primarily from the sale of the EMS business unit and the sale of related inventory from discontinued operations. Financing activities used cash of $1,695,000 for the year ended December 31, 2011 consisting of $1,249,000 to pay down the Company’s revolving line-of-credit and $448,000 to pay down long-term borrowings.

The current ratio was 7.6 to 1 at December 31, 2012 and 3.7 to 1 at December 31, 2011. Working capital equaled $3,894,000 on December 31, 2012, compared to $1,517,000 on December 31, 2011.

In December 2011, the Company paid the outstanding balance satisfying the mortgage note payable with US Bank National Association.

The Company’s future capital requirements, inclusive of expenses for the Company’s SaaS business model as further described in this Form 10-K, will depend on many factors, including the timing and amount of its revenues and its investment decisions, which may affect the Company’s ability to generate additional cash. The Company’s management believes that its cash balance and existing working capital will be adequate to fund its cash requirements for at least the next twelve months. However, delays in, or changes to any of the above plans could result in the Company needing additional financing, which may not be available to the Company, or may not be available on terms favorable to the Company.

CRITICAL ACCOUNTING 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. Winland cannot assure you that actual results will not differ from those estimates. Winland believes the following are the most critical judgments and estimates used in the preparation of its financial statements.

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.

Inventory Valuation: Inventories are stated at the lower of cost or market and include materials, labor, and overhead costs. Cost is determined using the first-in, first-out method (FIFO). The majority of the inventory is purchased based upon contractual forecasts and customer purchase orders. Even though contractual arrangements may be in place, we are still required to assess the utilization of inventory. In assessing the ultimate realization of inventories, judgments as to future demand requirements are made and compared to the current or committed inventory levels and contractual inventory holding requirements. Reserve requirements generally increase as projected demand requirements decrease due to market conditions, technological and product life cycle changes as well as longer than previously expected usage periods. Management’s estimated reserve for slow moving and obsolete finished goods inventories was $24,000 and $30,000 as of December 31, 2012 and 2011, respectively.

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Allowance for Doubtful Accounts: The Company generally requires no collateral from its customer with respect to trade accounts receivable. Invoice terms vary by customer but are generally due 30 days after presentation. Accounts receivable are considered past due if not paid in accordance with the terms established with the customer. 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 had no bad debt expense for the year ended December 31, 2012. Bad debt expense for the year ended December 31, 2011 was $1,000. 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 $7,000 at both December 31, 2012 and 2011.

Allowance for Rework and Warranty Costs: Winland provides a limited warranty for its Proprietary 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 are 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 $15,000 and $13,100 as of December 31, 2012 and 2011, respectively. The product warranty liability reflects management’s best estimate of probable liability under Winland’s product warranties and may differ from actual results.

Income Taxes: 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. Winland 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, 2012 and 2011 was $1,853,000 and $1,889,000 respectively. The net change in the total valuation allowance for the years ended December 31, 2012 and 2011 was an increase (decrease) of ($36,000) and $296,000. The tax effect of the Company’s valuation allowance for deferred tax assets is included in the annual effective tax rate. As of December 31, 2012 and 2011, the Company calculated its estimated annualized effective tax benefit rate at 0% and -1.2%, respectively. The Company recognized an income tax expense of $0 (net of the valuation allowance) based on its $634,000 pre-tax loss from continuing operations for the year ended 2012 compared to an income tax benefit of $9,000 (net of the valuation allowance) based on its $1,051,000 pre-tax loss from continuing operations for the year ended 2011.

In addition, Winland reevaluates the technical merits of its tax positions and recognizes an uncertain tax benefit, or derecognizes a previously recorded tax benefit, when (i) there is a completion of a tax audit, (ii) there is a change in applicable tax law including a tax case or legislative guidance, or (iii) there is an expiration of the statute of limitations. Significant judgment is required in accounting for tax reserves. Although Winland believes that it has adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these tax authorities could have a material impact on Winland’s effective tax rate in future periods.

CAUTIONARY STATEMENTS

Certain statements contained in this Annual Report on Form 10-K and other written and oral statements made from time to time by Winland do not relate strictly to historical or current facts. As such, they are considered “forward-looking statements” that provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “possible,” “plan,” “project,” “should,” “will,” “forecast” and similar words or expressions. Winland’s forward-looking statements generally relate to its purchase order levels, growth strategies, financial results, product development, sales efforts and sufficiency of capital. One must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions, including, among others, those discussed below. Consequently, no forward-looking statement can be guaranteed, and actual results may vary materially from results or circumstances described in such forward looking statements. As provided for under the Private Securities Litigation Reform Act of 1995, Winland wishes to caution investors that the following important factors, among others, in some cases have affected and in the future could affect Winland’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 Winland.

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●	Winland derives a significant portion of its revenues from a limited number of distributors that are not subject to long-term contracts with Winland;

●	Winland’s ability to compete successfully depends, in part, upon the price at which Winland is willing to sell a proposed product and the quality of its design;

●	there is no assurance that Winland will be able to continue to obtain purchase orders from existing and new customers on financially advantageous terms, and the failure to do so could prevent it from achieving the growth it anticipates;

●	an overall uncertainty in economic activity may have a negative impact on Winland’s customer’s ability to pay for the products they purchase from Winland;

●	Winland’s ability to increase revenues and profits is dependent upon its ability to retain valued existing customers and obtain new customers that fit its customer profile;

●	The acceptance of Winland’s EA800-ip by the marketplace;

●	The market for SaaS business applications may develop more slowly than Winland expects;

●	Many of Winland’s customers are price sensitive, and if the prices Winland charges for its services are unacceptable to its customers, Winland’s operating results will be harmed;

●	If Winland fails to develop our brand cost-effectively, its business may suffer;

●	Winland might require additional capital to support its strategic growth plan, and this capital might not be available on acceptable terms, if at all; and

●	In the event Winland is unable to retain existing proprietary product customers or to grow its SaaS customer base by adding new customers, its operating results will be adversely affected.

In addition, see “Risk Factors” under Item 1A, which includes a discussion of additional risk factors and a more complete discussion of some of the cautionary statements noted above.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.

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ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements are at the pages set forth below:

Report of Independent Registered Public Accounting Firm as of and for the Years Ended December 31, 2012 and 2011	15

Balance Sheets as of December 31, 2012 and 2011	16 - 17

Statements of Operations for the Years Ended December 31, 2012 and 2011	18

Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2012 and 2011	19

Statements of Cash Flows for the Years Ended December 31, 2012 and 2011	20

Notes to Financial Statements	21 - 32

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders, Audit Committee and Board of Directors

Winland Electronics, Inc.

Mankato, Minnesota

We have audited the accompanying balance sheets of Winland Electronics, Inc. as of December 31, 2012 and 2011, and the related statements of operations, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Winland Electronics, Inc. as of December 31, 2012 and 2011 and the results of its operations and cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Baker Tilly Virchow Krause, LLP

Minneapolis, Minnesota

March 22, 2013

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Winland Electronics, Inc.

Balance Sheets

As of December 31, 2012 and 2011

(In Thousands)

	December 31,
Assets	2012		2011
Current Assets
Cash and cash equivalents	$	390	$	1,031
Funds held in escrow from sale of manuafacturing facility, including land (Note 7)		2,641		-
Accounts receivable, less allowance for doubtful accounts of $7 as of both December 31, 2012 and 2011 (Note 9)		516		449
Inventories (Note 2)		884		567
Prepaid expenses and other assets		56		31
Total current assets		4,487		2,078

Property and Equipment, at cost (Note 1)
Machinery and equipment		153		153
Data processing equipment		125		118
Office furniture and equipment		43		43
Total property and equipment		321		314

Less accumulated depreciation and amortization		278		246
Net property and equipment		43		68

Assets of discontinued operations
Assets held for sale, net (Note 1, 7)		-		2,135
Deferred rent receivable		-		261
Total assets	$	4,530	$	4,542

See Notes to Financial Statements

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Winland Electronics, Inc.

Balance Sheets

As of December 31, 2012 and 2011

(In Thousands, Except Share and Per Share Data)

	December 31,
Liabilities and Stockholders’ Equity	2012			2011
Current Liabilities
Accounts payable	$	503		$	421
Accrued liabilities:
Compensation		60			110
Other		30			30
Total current liabilities		593			561

Long-Term Liabilities of discontinued operations
Deferred revenue (Note 4)		-			106
Total long-term liabilities of discontinued operations		-			106

Total liabilities		593			667

Commitments and Contingencies

Stockholders’ Equity (Notes 6 and 11)
Common stock, par value $0.01 per share; authorized 20,000,000 shares; issued and outstanding 3,701,630 shares as of both December 31, 2012 and 2011		37			37
Additional paid-in capital		5,055			5,014
Accumulated deficit		(1,155	)		(1,176	)
Total stockholders’ equity		3,937			3,875
Total liabilities and stockholders’ equity	$	4,530		$	4,542

See Notes to Financial Statements

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Winland Electronics, Inc.

Statements of Operations

For the Years Ended December 31, 2012 and 2011

(In Thousands, Except Share and Per Share Data)

	December 31,
	2012			2011
Net sales (Note 10)	$	3,713		$	3,444
Cost of sales		2,622			2,495
Gross profit		1,091			949

Operating expenses:
General and administrative		762			852
Sales and marketing		688			883
Research and development		285			237
		1,735			1,972

Operating loss		(644	)		(1,023	)

Other income (expenses):
Interest expense		-			(54	)
Other, net		10			26
		10			(28	)

Loss from continuing operations before income taxes		(634	)		(1,051	)

Income tax expense (Note 5)		-			(9	)
Loss from continuing operations		(634	)		(1,060	)
Income from discontinued operations, net of tax		655			320

Net income (loss)	$	21		$	(740	)

Income (loss) per common share data:
Basic and diluted	$	0.01		$	(0.20	)
Loss from continuing operations per common share data:
Basic and diluted	$	(0.17	)	$	(0.29	)
Income from discontinued operations per common share data:
Basic and diluted	$	0.18		$	0.09
Weighted-average number of common shares outstanding:
Basic and diluted		3,701,630			3,701,045

See Notes to Financial Statements

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Winland Electronics, Inc.

Statements of Changes in Stockholders’ Equity

For the Years Ended December 31, 2012 and 2011

(In Thousands, Except Share Data)

					Additional
	Common Stock				Paid-In			Accumulated
	Shares		Amount		Capital			Deficit			Total
Balance on December 31, 2010		3,699,230	$	37	$	5,025		$	(436	)	$	4,626

Issuance of common stock in accordance with employee stock option plan (Note 6)		2,400		-		2			-			2
Stock-based compensation benefit		-		-		(13	)		-			(13	)
Net loss		-		-		-			(740	)		(740	)
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

See Notes to Financial Statements

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Winland Electronics, Inc.

Statements of Cash Flows

For the Years Ended December 31, 2012 and 2011

(In Thousands)

	2012			2011
Cash Flows From Operating Activities
Net income (loss)	$	21		$	(740	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		32			110
Non-cash stock based compensation expense (benefit)		41			(13	)
Gain on sale of facility, including land		(506	)		-
Decrease in allowance for doubtful accounts		-			(3	)
Decrease in allowance for obsolete inventory held for discontinued operations		-			(56	)
Changes in operating assets and liabilities:
Accounts receivable		(67	)		(39	)
Refundable income taxes		-			277
Inventories		(317	)		(455	)
Deferred rent receivable		261			(261	)
Prepaid expenses and other assets		(25	)		56
Accounts payable		82			40
Accrued liabilities, including deferred revenue and other short-term tax liabilities		(156	)		(421	)
Net cash used in operating activities		(634	)		(1,505	)

Cash Flows From Investing Activities
Purchases of property and equipment		(7	)		(10	)
Sale of inventory from discontinued operations		-			2,906
Cash from sale of EMS business unit, net of transaction costs		-			1,017
Net cash provided by (used in) investing activities		(7	)		3,913

Cash Flows From Financing Activities
Net repayments on revolving line-of-credit agreement		-			(1,249	)
Principal payments on long-term borrowings, including capital lease obligations		-			(448	)
Proceeds from issuance of common stock		-			2
Net cash used in financing activities		-			(1,695	)

Net increase (decrease) in cash and cash equivalents		(641	)		713

Cash and cash equivalents
Beginning of year		1,031			318
End of year	$	390		$	1,031

Supplemental Disclosures of Cash Flow Information
Cash payments for interest	$	-		$	65
Cash receipts from income taxes	$	-		$	209

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 2012 and 2011.

Discontinued Operations: Included in discontinued operations is Winland’s Electronic Manufacturing Services (EMS) operation. The sale of the EMS operations to a third party was completed on January 1, 2011 pursuant to the terms of an Asset Purchase Agreement dated November 15, 2010 (the “APA”). The transaction involved the sale of 100% of Winland’s EMS assets and assumptions of certain liabilities under the APA. The Company’s shareholders approved the sale on December 29, 2010.

In September 2011, the Company made a formal decision to sell the Company’s land and building. Based on an expected sale date within one year, the Company as of December 31, 2011 classified the land and building as assets held for sale. 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.

These transactions 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 “Loss from discontinued operations, net of tax” for all periods presented, and the respective assets and liabilities on the balance sheets have been separately classified as “Assets/Liabilities of discontinued operations”. 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 7).

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.

Rental revenue included rents that our tenant paid in accordance with the terms of its lease reported on a straight-line basis over the non-cancellable term of the lease. The lease provided for tenant occupancy during periods where no rent was due or where minimum rent payments changed during the term of the lease. Deferred rent in the accompanying balance sheet included the cumulative difference between rental revenue as recorded on a straight-line basis and rents received from the tenant in accordance with the lease terms.

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.

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Note 1.

Nature of Business and Significant Accounting Policies (Continued)

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, 2012 and 2011.

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 $24 and $30 as of December 31, 2012 and 2011, 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

Long-lived assets: Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets including the operating and macroeconomic factors that may affect them. The Company uses historical financial information, internal plans and projections and industry information in making such estimates. While the Company currently believes the expected cash flows from these long-lived assets exceeds the carrying amount, materially different assumptions regarding future performance and discount rates could result in future impairment losses. Such impairment would adversely affect earnings. No impairment losses were recognized in 2012 or 2011.

Allowance for Rework and Warranty Costs: Winland provides a limited warranty for its Proprietary 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 and $13 as of December 31, 2012 and 2011, respectively. 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)	2012			2011
Balance, Beginning	$	13		$	11
Accruals for products sold		20			7
Expensing of specific warranty items		(15	)		(3	)
Change in estimate		(3	)		(2	)
Balance, Ending	$	15		$	13

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Note 1.

Nature of Business and Significant Accounting Policies (Continued)

Income taxes: Income taxes are accounted for in accordance with FASB ASC Topic 740 Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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.

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 6).

For years ended December 31, 2012 and 2011, 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 471,000 and 190,000 shares for the years ended December 31, 2012 and 2011, respectively, as inclusion of these shares would have been anti-dilutive.

Employee stock based compensation plans: At December 31, 2012, Winland had stock-based compensation plans, which are described more fully in Note 6. Winland accounts for these plans under FASB ASC Topic 718, Stock Compensation.

Advertising expense: Advertising is expensed as incurred and was $14 and $40 for the years ended December 31, 2012 and 2011, respectively.

Research and Development Expense: The Company expenses research and development costs as incurred. Research and development expenses of $285 and $237 were charged to operations during the years ended December 31, 2012 and 2011, 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. See Note 13 for more information regarding subsequent events.

Note 2.

Inventories

The components of inventories at December 31, 2012 and 2011 were as follows:

	December 31
	2012		2011
Raw materials	$	114	$	14
Finished goods		770		553
Total, net	$	884	$	567

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Note 3.

Financing Arrangement and Long-Term Debt

Effective January 3, 2011, Winland and TCI Business Capital, Inc. (“TCI”), entered into a Factoring, Security and Service Agreement (the “Agreement”). The Agreement allowed TCI to purchase from the Company certain eligible accounts receivable based on TCI’s sole and absolute discretion and was terminated by mutual agreement between the Company and TCI in April 2011 for a fee of $5.

On January 1, 2011, Winland had an Accounts Receivable Agreement with PrinSource Capital Companies, LLC (“PrinSource”). The agreement was terminated on January 3, 2011 with Winland paying $3 to PrinSource for factoring of accounts receivable for the year ended December 31, 2011.

In December 2011, the Company paid the outstanding balance satisfying the mortgage note payable with US Bank National Association.

Note 4.

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 $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 5.

Income Taxes

Components of income tax expense are as follows:

	Year Ended December 31
	2012		2011
Current expense	$	-	$	(9	)
Deferred benefit		-		-
	$	-	$	(9	)

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

	December 31
	2012			2011
Statutory U.S. income tax rate		34	%		(34	)%
State benefit (tax), net of federal tax effect		4			(3	)
Change in valuation allowance		(40	)		39
Other, including permanent differences		2			(1	)
Effective income tax benefit rate		-	%		1	%

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Note 5.

Income Taxes (Continued)

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

	December 31
	2012			2011
Deferred tax assets:
Inventory	$	23		$	22
Allowance for doubtful accounts		2			2
Non-qualified stock options		89			89
Accrued expenses		3			8
Research credit carryover		8			8
Net operating loss carryforward		1,733			1,773
Other		23			23
Valuation allowance		(1,853	)		(1,889	)
		28			36
Deferred tax liabilities:
Property and equipment		(9	)		(25	)
Prepaid expenses		(19	)		(11	)
		(28	)		(36	)
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. Winland 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, 2012 and 2011 was $1,853 and $1,889 respectively. The net change in the total valuation allowance for the years ended December 31, 2012 and 2011 was an increase (decrease) of ($36) and $296, respectively. The tax effect of the Company’s valuation allowance for deferred tax assets is included in the annual effective tax rate. As of December 31, 2012 and 2011, the Company calculated its estimated annualized effective tax benefit rate at 0% and -1.2%, respectively. The Company recognized an income tax expense of $0 (net of the valuation allowance) based on its $634 pre-tax loss from continuing operations for year ended 2012 compared to an income tax benefit of $9 (net of the valuation allowance) based on its $1,051,000 pre-tax loss from continuing operations for year ended 2011.

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.

The Company files income tax returns in the U.S. federal and state jurisdictions and during 2011 settled an examination by the State of Minnesota for its 2003 through 2006 tax years. The Company recognized a $301 reduction in income tax expense as of December 31, 2007 for credits filed with the Internal Revenue Service and the State of Minnesota for tax years 2003 through 2007, net of $129 reserve for FASB ASC 740, Income Taxes. The Company reached a settlement with the Internal Revenue Service during 2010 which resulted in a reduction of $200 to the unrecognized tax benefit balance.

The Company reached a settlement with the Minnesota Department of Revenue during 2011 which resulted in a reduction of $68 to the unrecognized tax benefit balance. The years 2009 through 2012 remain open for examination by other agencies.

A reconciliation of the unrecognized tax benefit is as follows:

	2012		2011
Beginning Balance	$	-	$	68
Additions for tax positions taken for open tax years		-		-
Deductions for tax positions closed		-		(68	)
Ending Balance	$	-	$	-

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Note 5.

Income Taxes (Continued)

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, 2012 and 2011, 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, 2012, the Company had net operating loss carryforwards for federal purposes of $4,268 and $4,367 for state income tax purposes that are available to offset future taxable income and begin to expire in the year 2022. At December 31, 2012, 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 6.

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.

Employee stock purchase plan: The 1997 Employee Stock Purchase Plan (ESPP) has provided Winland employees the opportunity to purchase common stock through payroll deductions. The purchase price is set at the lower of 85% of the fair market value of common stock at the beginning of the participation period or 85% of the fair market value on the purchase date. The participation periods have a 6-month duration beginning in January and July of each year. A total of 300,000 shares of common stock were authorized for issuance under the ESPP of which 136,880 have been issued. No shares were issued for the years ended December 31, 2012 and 2011, respectively.

Stock option plans: On January 25, 2013, Winland’s Board of Directors approved the 2013 Equity Incentive Plan from which 250,000 stock-based compensation awards can be granted to eligible employees, officers or directors and was the only equity-based compensation plan available. On February 28, 2013, Winland’s Board of Directors approved an amendment to the 2013 Equity Incentive Plan increasing the plan to 350,000 stock-based compensation awards available to grant. The plan is subject to approval by the Company’s shareholders. Previous to this plan, stock-based compensation awards were granted from the 2008 and 2005 Equity Incentive Plans. The plans are as follows:

2013 Equity Incentive Plan – This plan provides up to 350,000 awards in the form of incentive stock options, nonqualified stock options, and restricted stock. As of January 25, 2013, this is the only plan under which awards are authorized for grant. Awards issued under the plan as of March 15, 2013 include 185,000 shares of incentive stock options outstanding and which are unvested. 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 10 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. This plan is subject to shareholder approval.

On January 28, 2013, the Company issued 50,000 incentive stock options to Brian D. Lawrence, the Company’s Chief Financial Officer and Senior Vice President pursuant to the 2008 Equity Incentive Plan. These options had weighted average grant date fair value of $0.38 with annual vesting of twenty five percent (25%) over the next succeeding four years. Also on January 28, 2013, the Company issued 185,000 incentive stock options to David A. Gagne, the Company’s Chief Executive Officer pursuant to the 2013 Equity Incentive Plan. These options had an estimated grant date fair value of $0.38 with annual vesting of twenty five percent (25%) over the next succeeding four years.

2008 Equity Incentive Plan – This plan provided awards in the form of incentive stock options, nonqualified stock options, and restricted stock. As of December 31, 2012, this was the only plan under which awards were authorized for grant. As amended by the shareholders in May 2009, up to 500,000 shares are authorized for issuance under the plan. Awards issued under the plan as of December 31, 2012 include 185,000 shares of incentive stock options outstanding and which are un-vested and 256,000 nonqualified stock options which were outstanding and which were vested. This plan was terminated as to future grants in January 2013.

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Note 6.

Warrants and Stock-Based Compensation Plans (Continued)

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 10 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.

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, 2012, there were 27,500 options outstanding under this plan of which 27,500 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.

	December 31
	2012			2011
Expected life, in years		4			5
Expected volatility		79.1	%		80.3	%
Risk-free interest rate		0.4	%		1.8	%
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, 2012 and 2011, there were no such stock option exercises and disqualifying stock dispositions. Net cash proceeds from the exercise of stock options were $0 and $2 for the years ended December 31, 2012 and 2011, respectively.

In January 2011, 54,000 stock options were cancelled due to the termination of certain employees related to the sale of the EMS assets, with a weighted average exercise price of $1.24.

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Note 6.

Warrants and Stock-Based Compensation Plans (Continued)

The following table represents stock option activity for the years ended December 31, 2012 and 2011:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contract Life		Aggregate Intrinsic Value
Outstanding options at January 1, 2011		285,600		$	2.31
Granted		70,000			0.70
Exercised		(2,400	)		0.70
Forfeited		(165,700	)		2.44
Outstanding options at December 31, 2011		187,500		$	1.62		6.9	$	-

Exercisable at December 31, 2011		187,500		$	1.62		6.9	$	-

Outstanding options at January 1, 2012		187,500		$	1.62
Granted		305,000			0.72
Exercised		-			-
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

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 during 2012 and 2011 was $0.41 and $0.44, respectively.

The total fair value of shares vested during the years ended December 31, 2012 and 2011 was $38 and $44, respectively.

The following table summarizes information about stock options outstanding at December 31, 2012:

		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		419,000		8.6	$	0.72		234,000	$	0.63
$	0.896 - $1.792		22,000		5.3		1.74		22,000		1.74
$	1.792 - $2.240		5,500		5.0		2.23		5,500		2.23
$	2.240 - $3.584		11,000		4.4		3.27		11,000		3.27
$	3.584 - $4.480		11,000		2.9		4.30		11,000		4.30
			468,500		8.2	$	0.93		283,500	$	0.99

At December 31, 2012, there was $86 unrecognized compensation cost, adjusted for estimated forfeitures, related to share-based payments which is expected to be recognized over a weighted-average period of 2.5 years and will be adjusted for any future changes in estimated forfeitures.

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Note 7.

Discontinued Operations

On November 15, 2010, Winland entered into an Asset Purchase Agreement with Nortech Systems, Incorporated (“Nortech”). Pursuant to the terms of the Asset Purchase Agreement, Winland sold to Nortech the Company’s EMS business segment, which consisted of the design and manufacture of printed circuit board assemblies and higher level products sold mainly to original equipment manufacturer customers. The sale of the EMS segment to Nortech was completed on January 1, 2011 pursuant to the terms of the Asset Purchase Agreement and approved by the Company’s shareholders on December 29, 2010 (the “Asset Sale”).

Aggregate consideration for the Asset Sale consisted of the following: (i) $1,542 in cash, of which $1,042 was paid at closing, $250 was paid on July 1, 2011 and $250 was paid on October 1, 2011, (ii) inventory consumption of $2,906 against the obligation of at least $2,200, and (ii) the assumption of $2,073 of liabilities of the EMS business segment. The terms of the Asset Purchase Agreement and the amount of the consideration for the Asset Sale were negotiated by the Company and Nortech on an arms-length basis. The Asset Sale, net of transaction costs, resulted in a gain of approximately $59 during year ended December 31, 2011.

Cash consideration	$	1,542
Total liabilities to be assumed		2,073
Subtotal		3,615
Less: Transaction costs		(496	)
Net proceeds		3,119

Total assets to be assumed		(3,133	)
Reduction of reserve for inventory obsolescence		73
Net gain on assets sold	$	59

Additionally, in connection with the Asset Sale, the Company entered into (i) a manufacturing agreement with Nortech, whereby Nortech manufactures certain products for the Company related to the production of the Company’s proprietary monitoring devices, (ii) a lease agreement whereby the Company leased to Nortech, for six years, its office and manufacturing facility and improvements located at 1950 Excel Drive, Mankato Minnesota, 56001, and (iii) a sublease agreement with Nortech whereby Nortech subleased to the Company 1,000 square feet of the building that the Company leased to Nortech pursuant to the lease agreement, and (iv) non-compete agreements with the Company and certain key employees for a period of two-years.

Winland and Nortech entered into a manufacturing agreement effective January 1, 2011 pursuant to which Nortech manufactured certain products for Winland through July 1, 2011. The agreed upon transfer price for products manufactured was Winland’s current standard manufacturing costs at time of sale plus a five percent (5%) mark-up during the six months after the date of the agreement, seven percent (7%) during the seventh through ninth months after the date of the agreement and ten percent (10%) during the tenth through the twelfth months after the date of the agreement. On December 27, 2011, Winland and Nortech entered into a new Manufacturing Agreement replacing the prior manufacturing agreement.

The new Manufacturing Agreement provides Nortech exclusive rights to manufacture Winland’s finished goods requirements relating to specified products at a mutually agreed upon price. The new Manufacturing Agreement will expire on December 31, 2013.

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.

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Note 7.

Discontinued Operations (Continued)

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 $2,650,000. 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 $2,135,000, resulting in a gain of $506,000, after deducting expenses related to the sale of $9,000. Rental revenue for the year ended December 31, 2012, was $261,000, reduced by $218,000 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 $106,000 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.

	Year ended December 31,
(in thousands)	2012		2011
Net sales	$	-	$	2,906
Gross profit (loss)		-		-
Income from discontinued operations (1)		655		320

(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, 2012 or 2011.

Note 8.

Commitments and Contingencies

Operating leases: On January 1, 2013, the Company entered in to a twelve month lease for office space at 601 Carlson Parkway, Suite 1050, Minnetonka, MN which is used for the Company’s sales and marketing, product management and executive staff. Minimum lease payment obligations for this lease for the year ending December 31, 2013 are $36.

Note 9.

Employee Benefit Plans

Pension plan: Winland had a qualified defined contribution 401(k) profit-sharing plan for its employees who met certain age and service requirements. Employees were allowed to make contributions of up to 15% of their eligible compensation. The plan also provided for a Company-sponsored match as determined by the Board of Directors. Winland made no contributions to the plan for the year ended December 31, 2010. Effective December 31, 2010, Winland froze the plan with all contributions ceasing as of that date. The plan was terminated with all account balances being distributed during the year ended December 31, 2011.

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 $13 and $14 to the plan for the years ended December 31, 2012 and 2011, respectively.

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Note 10.

Major Customers

Winland has a customer which accounted for more than 10 percent of net sales for the years ended December 31, 2012 and 2011, as follows:

	2012			2011
Sales percentage:
Customer A		52	%		50	%
Accounts receivable percentage at December 31:
Customer A		56	%		49	%

Note 11.

Shareholder Rights Plan

On December 9, 2003, Winland’s Board of Directors adopted a Shareholder Rights Plan. Under the plan, rights were constructively distributed as a dividend at the rate of one right for each share of common stock of Winland held by the shareholders of record as of the close of business on December 31, 2003. Each right entitles its holder to purchase one-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $36. The rights will only be exercisable if a person or group acquires, has the right to acquire, or has commenced a tender offer for 15 percent or more of Winland’s outstanding common stock.

The rights are nonvoting, pay no dividends, expire, unless extended, on December 9, 2013, and may be redeemed by Winland for $0.001 per right at any time before the 15th day (subject to adjustment) after a 15 percent position is acquired. The rights have no effect on earnings per share until they become exercisable.

After the rights are exercisable, if Winland is acquired in a merger or other business combination, or if 50% or more of Winland’s assets are sold, each right will entitle its holder (other than the acquiring person or group) to purchase, at the then current exercise price, common stock of the acquiring entity having a value of twice the exercise price. In connection with the adoption of the Shareholder Rights Plan, the Board of Directors has designated 60,000 shares of previously undesignated stock as Series A Junior Participating Preferred Stock. The shares have a par value of $0.01 per share and a liquidation value equal to the greater of $100 or 100 times the aggregate amount to be distributed per share to holders of common stock. Shares of Series A Junior Participating Preferred Stock are not convertible into shares of Winland’s common stock. Each share of Series A Junior Participating Preferred Stock will be entitled to a minimum preferential quarterly dividend payment equal to the greater of $1 per share or an aggregate dividend of 100 times the dividend declared per share of common stock.

Each share of Series A Junior Participating Preferred Stock has 100 votes. In the event of any merger, consolidation or other transaction in which common stock is exchanged; each share of Series A Junior Participating Preferred Stock will be entitled to receive 100 times the amount received per share of common stock. There are no shares of Series A Junior Participating Preferred Stock outstanding.

Note 12 .

Severance Expense

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 $358,000. The agreements call for the amounts 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, 2011.

The following table provides financial information on the employee severance expense payable at December 31, 2012 and 2011.

		December 31, 2010				Net Additions				Payments				December 31, 2011
Employee Severance Expense		$	313			$	-			$	(270	)		$	43

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

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Note 12.

Severance Expense (Continued)

As part of the Company’s employment agreements with certain executive employees, if such employees are terminated without cause, severance payments may be due to such employees.

Note 13.

Subsequent Events

On April 11, 2012 the Company received a notice from NYSE Amex LLC indicating that it was not in compliance with the continued listing requirements due to: the Company having stockholders’ equity of less than $4,000,000 and losses from continuing operations and/or net losses in three of its four most recent fiscal years, as set forth in Section 1003(a)(ii) of the NYSE Amex Exchange’s Corporate Guide; and stockholders’ equity of less than $6,000,000 and losses from continuing operations and/or net losses in the Company’s five most recent fiscal years ended December 31, 2011, as set forth in Section 1003(a)(iii) of the NYSE Amex Exchange’s Company Guide.

Despite the Company’s diligent efforts to meet the requirements of the NYSE Amex Exchange, On March 6, 2013 it was informed by the NYSE Amex Exchange that the Company’s common stock would be delisted. The Company’s common stock was immediately eligible for quotation on the OTC Bulletin Board and began trading on the OTC Bulletin Board as of the open of business on March 21, 2013. The OTC Bulletin Board symbol of the Company’s common stock is WELX.

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ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Winland’s principal executive and financial officers evaluated its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2012. Based upon that evaluation, it was concluded as of December 31, 2012, that Winland’s disclosure controls and procedures were effective to ensure that information it is required to disclose in the reports that Winland files under the Exchange Act is recorded, processed, summarized and reported within time periods specified in Securities and Exchange Commission rules and forms. In addition, the principal executive and financial officers concluded as of December 31, 2012 that its disclosure controls and procedures are also effective to ensure that information required to be disclosed in reports that Winland files or submits under the Exchange Act is accumulated and communicated to its management, including Winland’s chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Winland’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Winland’s internal control system over financial reporting is designed by, or under the supervision of, its chief financial officer, and is effected by its board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Winland’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that transactions are made only in accordance with the authorization of our management and directors; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized transactions that could have a material effect on the financial statements.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in condition, or that the degree of compliance with the policies or procedures may deteriorate.

Winland’s management assessed the effectiveness of Winland’s internal control over financial reporting as of December 31, 2012. In making this assessment, Winland’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on management’s assessment and those criteria, Winland’s management concluded that its internal control over financial reporting was effective as of December 31, 2012.

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This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control.

During the interim reporting periods March 31, June 30 and September 30, 2012, the Company’s Chief Financial Officer prepared the financial statements with Winland’s Audit Committee Chair providing a secondary review due to the Company not having a Chief Executive Officer. Upon the hiring of the Chief Executive Officer in December 2012, the Chief Executive Officer provided a secondary review of the financials for the three months ended December 31, 2012 as prepared by the Company’s Chief Financial Officer. This process may be deemed a change in the Company’s internal control over financial reporting during the period that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 is incorporated by reference to Winland’s definitive proxy statement for its 2013 Annual Meeting of Shareholders under the captions “Executive Compensation” and “Corporate Governance – Compensation to Non-Employee Directors.”

ITEM 11.

EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference to Winland’s definitive proxy statement for its 2013 Annual Meeting of Shareholders under the captions “Executive Compensation” and “Corporate Governance – Compensation to Non-Employee Directors.”

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table provides information as of March 15, 2013 concerning the beneficial ownership of our Common Stock by (i) the persons known by us to own more than 5% of our outstanding Common Stock, (ii) each of our directors, (iii) the named executive officers and (iv) all current executive officers and directors as a group. Except as otherwise indicated, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock owned by them. As of March 15, 2013, there were 3,701,630 shares of our Common Stock issued and outstanding.

Name (and Address of 5% Owner) or Identity of Group	Number of Shares Beneficially Owned(1)			Percent of Class (1)
Lorin E. Krueger		120,536	(2)		3.3	%
Thomas J. Goodmanson		79,000	(3)		2.1	%
Thomas J. Brady		74,000	(4)		2.0	%
Richard T. Speckmann		72,100	(5)		1.9	%
David A. Gagne		50,000	(6)		1.3	%
Brian D. Lawrence		0			0	%
Thomas Braziel		345,529	(7)		9.3	%
Brian B. Hirschmann		333,120	(8)		9.0	%
Karen Hirschmann		301,353	(9)		8.1	%
Matt Houk		185,500	(10)		5.0	%
All Executive Officers and Directors as a Group (6 Individuals)		395,636	(11)		7.1	%

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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)	Includes 46,500 shares which may be purchased by Mr. Krueger upon exercise of currently exercisable options.

(3)	Includes 62,000 shares which may be purchased by Mr. Goodmanson upon exercise of currently exercisable options.

(4)	Includes 12,000 shares held by Mr. Brady’s spouse and 62,000 shares which may be purchased by Mr. Brady upon exercise of currently exercisable options.

(5)	Includes 63,000 shares which may be purchased by Mr. Speckmann upon exercise of currently exercisable options.

(6)	Includes 50,000 shares which may be purchased by Mr. Gagne upon exercise of currently exercisable options.

(7)

According to a Schedule 13D/A filed with the Securities and Exchange Commission on December 14, 2012 by BE Capital Partners LLC and Thomas Braziel, 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 70 th Street, Apt 10F, New York, NY, 10021.

(8)

According to a Schedule 13G/A filed with the Securities and Exchange Commission on February 11, 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, 39 th Floor, Los Angeles, CA, 90017.

(9)

According to a Schedule 13G/A filed with the Securities and Exchange Commission on February 12, 2013 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.

(10)

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.

(11)	Includes 283,500 shares which may be purchased by the executive officer and directors upon exercise of currently exercisable options.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information concerning Winland’s equity compensation plans as of December 31, 2012.

Table of Contents

	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 equit compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders (1)		468,500	$	0.93		222,120

Equity compensation plan not approved by security holders (2)		2,500	$	4.01		0

TOTALS		471,000	$	0.94		222,120

(1) Includes 163,120 shares available for issuance under Winland’s 1997 Employee Stock Purchase Plan.

(2) 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).

ITEM 13.

CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by Item 13 is incorporated by reference to Winland’s definitive proxy statement for its 2013 Annual Meeting of Shareholders under the captions “Corporate Governance” and “Certain Transactions.”

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is incorporated by reference to Winland’s definitive proxy statement for its 2013 Annual Meeting of Shareholders under the caption “Independent Registered Public Accounting Firm.”

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following exhibits are included in this report: See “Exhibit Index to Form 10-K” following the signature page of this Form 10-K.

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SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Winland has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Winland Electronics, Inc.


Dated: March 22, 2013	/s/ David A. Gagne
	David A. Gagne
	Chief Executive 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.

(Power of Attorney)

Each person whose signature appears below constitutes and appoints David A. Gagne and Brian D. Lawrence as his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, 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 attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

Signature and Title	Date

/s/ David A. Gagne	March 22, 2013
David A. Gagne
Chief Executive Officer
(Principal Executive Officer)

/s/ Brian D. Lawrence	March 22, 2013
Brian D. Lawrence
Chief Financial Officer and Senior Vice President
(Principal Financial Officer)

/s/ Thomas J. Goodmanson	March 22, 2013
Thomas J. Goodmanson
Director

/s/ Thomas J. Brady	March 22, 2013
Thomas J. Brady
Director

/s/ Richard T. Speckmann	March 22, 2013
Richard T. Speckmann
Director

/s/ Lorin E. Krueger	March 22, 2013
Lorin E. Krueger
Director

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

EXHIBIT INDEX TO FORM 10-K

For the Fiscal Year Ended December 31, 2012

Commission File No.: 1-15637

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 Current Report on Form 8-K dated March 5, 2001)

3.3	Certificate of Designation of Series A Junior Participating Preferred Stock – See Exhibit 4.2

4.1	Specimen of Common Stock certificate (Incorporated by reference to Exhibit 4 to Registration Statement on Form S-4, SEC File No. 33-31246)

4.2	Rights Agreement dated December 9, 2003 between the Company and Wells Fargo Bank Minnesota, N.A., which includes the form of Certificate of Designation as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (Incorporated by reference to Exhibit 4.1 to the Form 8-A Registration Statement No. 001-15637 filed on December 10, 2003)

4.3	First Amendment to Rights Agreement dated December 1, 2004 by and among the Company, Wells Fargo Bank, N.A. and Registrar and Transfer Company (Incorporated by reference to Exhibit 4.2 to Form 8-A/A-1 Registration Statement No. 001-15637 filed December 3, 2004)

10.1	Winland Electronics, Inc. 1997 Employee Stock Purchase Plan as amended June 17, 2003 (Incorporated by reference to Exhibit 10.1 to Form 10-QSB for the quarter ended June 30, 2003)**

10.2	Term Note in the principal amount of $1,000,000 dated September 30, 2004 in favor of U.S. Bank, N.A. (Incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K dated September 30, 2004 and filed on October 6, 2004)

10.3	Term Loan Agreement dated September 30, 2004 between the Company and U.S. Bank, N.A. (Incorporated by reference to Exhibit 99.2 to Current Report on Form 8-K dated September 30, 2004 and filed on October 6, 2004)

10.4	Addendum to Term Loan Agreement and Note dated September 30, 2004 between the Company and U.S. Bank, N.A.(Incorporated by reference to Exhibit 99.3 to Current Report on Form 8-K dated September 30, 2004 and filed on October 6, 2004)

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Exhibit

Number

Item

10.5	Mortgage, Security Agreement and Assignment of Rents dated September 30, 2004 in favor of U.S. Bank, N.A. (Incorporated by reference to Exhibit 99.4 to Current Report on Form 8-K dated September 30, 2004 and filed on October 6, 2004)

10.6	2005 Equity Incentive Plan (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated May 10, 2005 and filed on May 13, 2005)

10.7	Employment Agreement dated January 23, 2007 between the Company and Glenn A. Kermes (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K dated January 23, 2007) **

10.8	Amendment to Employment Agreement between the Company and Glenn A. Kermes dated December 31, 2007 (Incorporated by reference to Exhibit 10.1 to Form 8-K dated December 31, 2007)**

10.9	Employment Agreement dated May 6, 2008 between the Company and Thomas J. de Petra (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated May 8, 2008) **

10.10	Winland Electronics, Inc. 1997 Employee Stock Purchase Plan as amended May 6, 2006 (Incorporated by reference to Form S-8 dated September 5, 2008)**

10.11	Winland Electronics, Inc. 2008 Equity Incentive Plan as amended May 5, 2009 (Incorporated by reference to Form S-8 dated June 10, 2009)**

10.12	Accounts Receivable Agreement between the Company and PrinSource Capital Companies, LLC (PrinSource), dated August 18, 2010 (Incorporated by reference to Exhibit 10.1 to Form 8-K dated August 18, 2010 and filed on August 24, 2010)

10.13	Asset Purchase Agreement between the Company and Nortech Systems, Incorporated (Nortech), dated November 15, 2010 (Incorporated by reference to Exhibit 10.1 to Form 8-K dated November 15, 2010 and filed on November 18, 2010)

10.14	Separation Agreement between the Company and Thomas J. de Petra dated December 28, 2010 (Incorporated by reference to Exhibit 10.48 to Form 10-K for year ended December 31, 2010) **

10.15	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) **

10.16	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)

10.17	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)

10.18	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)

10.19	Factoring, Security and Service Agreement between the Company and TCI Business Capital, Inc. (TCI), dated January 3, 2011 (Incorporated by reference to Exhibit 10.1 to Form 8-K dated January 3, 2011 and filed on January 10, 2011)

10.20	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)**

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Exhibit

Number

Item

10.21	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)

10.22	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)

10.23	Employment Agreement dated November 30, 2012 between the Company and David A. Gagne (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated December 6, 2012) **

10.24	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) **

10.25	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) **

10.26*	Building Purchase Agreement between the Company and Nortech Systems, Incorporated dated November 27, 2012

10.27*	Commercial Lease Agreement between the Company and Nortech Systems, Incorporated dated December 31, 2012

23.1*	Consent of Baker Tilly Virchow Krause, LLP

24.1*	Power of Attorney for David A. Gagne, Brian D. Lawrence, Lorin E. Krueger, Richard T. Speckmann, Thomas J. Goodmanson, Thomas J. Brady (included on signature page of this Form 10-K)

31.1*	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

31.2*	Certification of Chief Financial Officer and Senior Vice President Pursuant to Section 302 of the Sarbanes-Oxley Act

32.1*	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*	Certification of Chief Financial Officer and Senior Vice President Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith.

** Management agreement or compensatory plan or arrangement.

Exhibit 10.26

PURCHASE AGREEMENT

THIS AGREEMENT ("Agreement") is made as of November 27, 2012 (the "Effective Date"), between

Winland Electronics, Inc. ("Seller"),

and

Nortech Systems, Inc. ("Purchaser").

RECITALS

Seller desires to sell to Purchaser and Purchaser desires to purchase from Seller, upon the terms and conditions hereinafter set forth, all of that certain land at 1950 Excel Drive, Blue Earth County, Minnesota, together with the building and any and all improvements thereon, and Seller's interest in fixtures, equipment, fittings, partitions, doors, shelving, plants, shrubbery, landscaping, all plumbing, electric, and lighting fixtures in which Seller has any interest, now affixed to, located upon or used in any way in connection with the use, enjoyment, occupancy or operation of the property legally described in Exhibit A attached hereto, together with all appurtenances thereunto belonging or appertaining, and all right, title and interest which Seller may have in all easements, rights-of-way, roads, streets and ways bounding said property. Said property shall be hereinafter referred to as the "Property" or "Real Property," and the building and its contents and components shall be referred to as the "Building."

NOW, THEREFORE, in consideration of the premises and the mutual promises hereinafter set forth, the parties agree as follows:

1. Sale of Property . Seller agrees to sell to Purchaser and Purchaser agrees to buy from Seller the Property. Purchaser hereby acknowledges that Seller is agreeing to the terms sets forth in this Agreement in part because of the mutual relationship between the parties and the desire to maintain and grow such mutual relationship.

2. Purchase Price and Manner of Payment . The purchase price (the "Purchase Price") to be paid by Purchaser to Seller for the Property shall be Two Million Six Hundred Fifty Thousand Dollars ($2,650,000.00) and shall be payable in immediate available funds at Closing.

3. Closing .

(a)	The consummation of the purchase and sale of the Property ("Closing") shall take place on December 27, 2012, or such other date as is agreed upon by the parties, at the office of the Seller in Mankato, Minnesota, or at a title company of Purchaser’s choice in Mankato, Minnesota.

(b)

At Closing the required cash shall be paid and all documents necessary for the consummation of this transaction shall be executed and delivered to the parties entitled thereto. At Closing, the Title Company shall disburse the proceeds of sale to Seller and Seller shall deliver possession of the Property to Purchaser free of all tenancies and occupancies, except as contemplated by this Agreement; and

(c)	At Closing, Seller shall cause to be delivered to Purchaser the following documents:

(1)

Warranty Deed . A warranty deed in recordable form, properly executed by Seller, conveying to Purchaser the Property in fee simple, subject only to the Permitted Exceptions, as defined in section 5(a)(2);

(2)

Seller's Affidavit . An affidavit of title by Seller(s), indicating that on the Closing Date there are no outstanding, unsatisfied judgments, tax liens or bankruptcies against or involving Seller or the Real Property; that there has been no skill, labor or material furnished to the Property for which payment has not been made or for which mechanics' liens could be filed; and that there are no other unrecorded interests in the Property;

(3)

FIRPTA Affidavit . A non-foreign affidavit, properly executed and in recordable form, containing such information as is required by IRS §1445(b)(d) and its regulations;

(4)

IRS Reporting Form . The appropriate federal income tax reporting form, if any is required;

(5)

Title Policy . A title policy, or a suitably marked-up commitment for title insurance initialed by the Title Company, in the form required by this Agreement;

(6)

Bill of Sale . A Bill of Sale to all personal property included in this sale; and

(7)

Other Documents . All other documents reasonably necessary to transfer the Property to Purchaser free and clear of all encumbrances except Permitted Exceptions, consistent with the terms of this Agreement.

4.	Conditions to Closing .

(a)

The thirty-day period after delivery of a fully executed copy of this Agreement to both parties shall be the "Due Diligence Period." In addition to all other conditions to the completion of the transaction described in this Agreement, Seller and Purchaser agree that the Closing of this sale and purchase is subject to satisfaction, approval or waiver by Purchaser, in its sole discretion, of the conditions set forth below on or before the end of the Due Diligence Period:

(1)

Inspection and approval of the physical condition and potential use of the Property, including Purchaser obtaining all licenses required for its intended use, at Purchaser's sole cost, including without limitation, the availability of access, utility services, zoning, environmental matters, engineering and soil conditions. Purchaser shall have the right, at its expense, to conduct a Phase 1 Environmental Site Assessment of the Property. For the purpose of conducting physical inspections, Seller agrees to provide Purchaser and its authorized agents, reasonable access to the Property at all reasonable times during the Due Diligence Period. In the event of termination of this Agreement, Purchaser shall repair and restore any damage to the Property caused by Purchaser's testing and return the Property to substantially the same condition as existed prior to such entry;

(2)

Inspection and approval of, and to the extent now available, copies of tax bills, warranties, as-built plans and specifications, soil and environmental reports, insurance policies and a list of personal property; and

(3)

Purchaser shall have obtained financing approval from a financing institution of its choice.

(4)

Purchaser and Seller shall have negotiated a Lease whereby effective at Closing Seller shall lease, on a month-to-month basis, the current portion of the Building that Seller currently occupies at a rate of $842.75 per month.

(b)

If any of the conditions set forth above are not satisfied or waived by Purchaser, and/or Purchaser does not approve where such approval constitutes such a condition, Purchaser may notify Seller, in writing, of the termination of this Agreement ("Purchaser's Termination Notice") prior to the end of the final day of the Due Diligence Period. Upon receipt of Purchaser's Termination Notice, Purchaser shall be released and discharged from all further obligations under this Agreement and neither Seller nor Purchaser shall be subject to any claim by the other for damages of any kind. If no Purchaser's Termination Notice has been served upon Seller within the time provided in this section 4, all conditions shall be deemed to have been satisfied or waived and Purchaser's obligations to close shall be firm with respect to the conditions of this section 4;

(c)

Between the Effective Date and the Closing Date, Seller shall maintain the Property in the same condition as presently exists, reasonable wear and tear excepted, including the maintenance of adequate liability insurance and insurance against loss by fire, windstorm and other hazards, casualties and contingencies, including vandalism and malicious mischief; and

5. Evidence of Title . As evidence of Seller's title, Seller shall deliver to Purchaser:

(a)

Title Commitment . As soon as practicable after the Effective Date, at Seller's expense, a title commitment that Purchaser agrees is satisfactory for an ALTA Form B owner's policy of title insurance ("Commitment") issued by the North American Title Company (the "Title Company"), in the amount of the Purchase Price showing marketable title in Seller. Title Company shall supply Purchaser with an endorsement updating the effective date of the commitment and disclosing any new matters of record within forty-eight (48) hours of the Effective Date. If the Commitment discloses exceptions to such title, Purchaser, within ten (10) business days following the date on which Purchaser receives the Commitment, shall deliver to Seller written notice of Purchaser's objections, if any, to such exceptions. If Purchaser fails to deliver such written notice of objections to Seller within such ten (10) day period, Purchaser shall be deemed to have waived its right to object to such exceptions. If Purchaser shall so object to any such exceptions, Seller and the Title Company shall notify Purchaser within twenty (20) business days following the date of Purchaser's notice of such objections that either (i) the exceptions have been, or will be at or prior to Closing, removed from the Commitment or are or will be insured over by the Title Company pursuant to an endorsement to the Commitment, or (ii) Seller has failed to arrange to have the exceptions removed or insured over by the Title Company. Seller will, if title is found unmarketable, use diligent efforts to correct defect(s) in title within the time provided therefore, but is not obligated to bring any suits to correct title. If Seller does not notify Purchaser that it has arranged to have the exceptions removed or insured over within said twenty (20) day period, Purchaser may elect either:

(1)

to terminate this Agreement; or

(2)

to take title as it then is, as shown on the Commitment, subject to such exceptions (the "Permitted Exceptions").

Notice of such election must be made within ten (10) business days following expiration of said twenty (20) day period.

If Purchaser does not give such notice of its election to so terminate this Agreement, this Agreement shall remain in full force and effect.

On the Closing Date, the Title Company shall issue an owner's title insurance policy at Purchaser's option and cost insuring fee simple title in Purchaser as of the Closing Date, in accordance with the Commitment, subject only to the Permitted Exceptions.

(b)

Evidence of Title and Other Materials . At the time of delivery of this Agreement to Purchaser, fully executed by Seller, Seller agrees to deliver to Purchaser copies of all title information in possession of or available to Seller, including but not limited to, title insurance policies, abstracts of title, attorney's opinions on title, surveys, restrictive covenants, deeds, notes and deeds of trust and easements relating to the Property. Seller does not have an abstract of title, attorney’s opinion, survey, or any other documents related to the Property and shall be under no obligation to deliver any of said items to Purchaser.

6. Seller's Representations and Warranties . Seller represents and warrants that as of the date hereof:

(a)

Seller has received no notice from any governmental authority of any pending or threatened (i) zoning, building, fire or health code violations or violations of other governmental requirements or regulations with respect to the Property that have not previously been corrected, or (ii) condemnation of the Property or that the Property does not violate any provision of any applicable zoning, subdivision, building code, fire regulations, or other governmental codes, ordinances or regulations. Seller further warrants and represents that in the event it receives any such notice prior to the Closing Date, it will provide to Purchaser copies of any such notice. Seller agrees to use reasonable efforts to correct any matters disclosed in such notice. If any such matter cannot be corrected by Seller by Closing, Seller shall give Purchaser a credit at Closing for the amount estimated to be required to correct such matter;

(b)	There are or will be at Closing no leases or other agreements for occupancy in effect with respect to the Property except those which Purchaser approves in writing during the Due Diligence Period;

(c)	Seller knows of no wells on the Property;

(d)	Environmental Matters:

(1)

Seller has not caused or allowed the generation, treatment, storage or disposal of hazardous substances onto, into, at or near the Real Property except in accordance with federal, state and local statutes, regulations or ordinances applicable at the time of Closing;

(2)

Seller has not caused or allowed the release of any hazardous substance onto, into, at or near the Real Property in violation of any applicable laws or regulations in effect at Closing;

(3)

To its knowledge, Seller is in compliance with all applicable federal, state and local statutes, regulations, ordinances and rules regarding the handling of hazardous substances at the Real Property;

(4)

To its knowledge, Seller has secured all necessary permits, licenses and approvals necessary to the operation of the business on the Real Property and that Seller is in compliance with all such permits, licenses and approvals. Seller has not received and has no knowledge of any violation or alleged violation of any such permits, licenses and approvals; and

(5)

There are no underground storage tanks located on the Real Property.

As used herein, the term "hazardous substance" means any hazardous, extremely hazardous or toxic substance, material, waste, pollutant or effluent including, but not limited to, asbestos, petroleum and those substances, materials or wastes listed in or under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. 9601, et. seq.), as amended by the Superfund Amendments and Reauthorization Act of 1986 (Pub. L. No. 99-499, and regulations promulgated thereunder, and such other substances, materials, wastes, pollutants, air pollutants, toxic pollutants or effluents that are presently regulated under applicable federal, state and local statutes, regulations, ordinances or rules and amendments thereto.

As used herein, the term "release" means spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing of any hazardous substance into or on the soils or waters in, on or under the Real Property;

(e)	FIRPTA . Seller is not a "Foreign Person," "Foreign Partnership," "Foreign Trust," or "Foreign Estate" as those terms are defined in Section 1445 of the Internal Revenue Code;

(f)	There are no facts known to Seller materially affecting the value of the Real Property or Buildings which are not readily observable by Purchaser or which have not been disclosed to Purchaser;

(g)

Seller shall provide a true and accurate schedule of all personal property owned by it and used in connection with the Buildings, and said schedule shall be considered to be a part of this Agreement. All of said personal property is to be included in this sale and at Closing shall be free and clear of all liens and encumbrances. Any personal property that Seller believes is not used in connection with the Building and which Seller intends to remove shall be listed on the schedule referred to in this paragraph (g).

(h)

All functional systems and structural components of the Buildings, including without limitation, the roofs, floors, appliances, controls, fixtures, plumbing, wiring and any other electrical or mechanical apparatus installed and used in connection with the Property shall be maintained in their present condition by Seller until Closing, normal wear and tear excepted;

(i)	Drainage on the Property is sufficient to allow its use and the use of the improvements thereon without any material interference by standing or draining water;

(j)	To Seller’s knowledge, no asbestos or asbestos-related products are present in the Buildings;

(k)	There is no litigation or proceeding of any type pending, or, to the knowledge of Seller, threatened, against or relating to Seller or the Property, nor does Seller know or have any reasonable grounds to know of any basis for any such action, relative to Seller or the Property;

(l)

Seller is the sole owner of the Property and the execution and delivery of this Agreement and the consummation of the sale contemplated hereby are duly authorized acts of Seller and are legally binding upon Seller. There are no outstanding agreements or other impediments prohibiting Seller's closing of the transaction contemplated hereby in accordance with the terms hereof; and

(m)	All representations and warranties of Seller contained in this Agreement shall be true at Closing as though such representations and warranties were made at such time.

7. Seller's Covenants . Between the date of the execution of this Agreement and the Closing, Seller shall:

(a)	Maintain the Property in its present condition, ordinary wear and tear excepted;

(b)	Maintain adequate liability insurance and insurance against loss from fire, windstorm and other hazards, casualties and contingencies, including vandalism and malicious mischief with respect to the Property; and

(c)	Operate and manage the Property in the same manner done by Seller prior to the date hereof.

8. Prorations . The following adjustments to the Purchase Price paid hereunder shall be made between Seller and Purchaser and shall be prorated (as applicable) on a per diem basis (on a calendar year) up to and including the Closing Date:

(a)	The portion of the rent paid by Purchaser pursuant to the Commercial Building Lease by and between Purchaser and Seller dated January 1, 2011, for any days in the current month after the Closing Date; and

(b)	Utility deposits, rents and all other tenant deposits, premiums under assigned insurance policies (if any), utility charges and deposits made by Seller with respect to utilities (which deposits shall either be refunded in full to Seller or credited to Seller at Closing).

For purposes of all prorations provided for herein, Seller shall be responsible for all days up to and including the Closing Date, and Purchaser shall be responsible for all days thereafter.

9. Transfer Taxes; Title Charges . Seller and Purchaser agree to execute any real estate transfer declarations required by the state, county or municipality in which the Real Estate is located. Documentary stamps on the deed and recording corrective instruments shall be paid by Seller. All other expenses of sale, including but not limited to title insurance premium, documentary stamps and intangible tax on mortgage financing, closing costs, Title Company charges and fees, recording the deed and financing statements and the like, shall be divided equally between the parties. If the transaction is terminated by either party on account of default by the other, the defaulting party shall pay all escrow costs billed by the Title Company. If this transaction shall close as provided in this Agreement, or be terminated other than on account of the default of either party, the closing fee of the Title Company shall be paid by Purchaser. Each party shall pay its own attorneys' fees except as otherwise provided in this Agreement.

10. Risk of Loss . Seller shall bear all risk of loss with respect to the Property up to the Closing Date. Notwithstanding the foregoing, in the event of damage to the Property by fire or other casualty prior to the Closing Date, repair of which would cost less than Ten Thousand ($10,000) Dollars (as determined by Seller in good faith), Purchaser shall not have the right to terminate its obligations under this Agreement by reason thereof, but Seller shall either repair and restore the Property or assign and transfer to Purchaser on the Closing Date all of Seller's right, title and interest in and to all insurance proceeds paid or payable to Seller on account of such fire or casualty. Seller shall promptly notify Purchaser in writing of any such fire or other casualty and Seller's determination of the cost to repair the damage caused thereby. In the event of damage to the Property by fire or other casualty prior to the Closing Date, repair of which would cost in excess of Ten Thousand ($10,000) Dollars (as determined by Seller in good faith), then this Agreement may be terminated at the option of Purchaser, which option shall be exercised, if at all, by Purchaser's written notice thereof to Seller within ten (10) business days after Purchaser receives written notice of such fire or other casualty and Seller's determination of the amount of such damages, and upon the exercise of such option by Purchaser this Agreement shall become null and void, and neither party shall have any further liability or obligations hereunder. If Purchaser does not so elect to terminate, then Seller shall assign and transfer to Purchaser on the Closing Date all of Seller's right, title and interest in and to all insurance proceeds paid or payable to Seller on account of such fire or casualty, and Seller shall have no obligation to repair or restore the Property.

11. Condemnation . If between the date of this Agreement and the Closing Date, any condemnation or eminent domain proceedings are initiated which might result in the taking of any part of the Real Estate or the Building or the taking or closing of any right of access to the Property, Purchaser may:

(a)

terminate this Agreement by written notice to Seller; or

(b)

proceed with the Closing, in which event Seller shall assign to Purchaser all of Seller's right, title and interest in and to any award made in connection with such condemnation or eminent domain proceedings.

Seller shall immediately notify Purchaser, in writing, of the commencement or occurrence of any condemnation or eminent domain proceedings. If such proceedings would result in the taking of any of the Real Estate or the Improvements or the taking or closing of any right of access to the Property, Purchaser shall then notify Seller, within twenty (20) days of Purchaser's receipt of Seller's Notice, whether Purchaser elects to exercise its rights under subparagraph (a) or subparagraph (b) of this section 11. If Purchaser fails to make an election within such twenty (20) period, Purchaser shall be deemed to have elected to exercise its rights under subparagraph (b) and Closing shall be delayed, if necessary, until the later to occur of (i) the Closing Date or (ii) five (5) days after the expiration of the twenty (20) day period.

12. Default . If the transaction described in this Agreement is not consummated as provided herein on the Closing Date by reason of a default by Seller hereunder, then Purchaser may elect to pursue either of the following remedies:

(a)	If Seller fails to cure the default within thirty (30) days after written notice thereof is given by Purchaser to Seller, then Purchaser may terminate this Agreement by written notice to Seller, in which event all further rights and obligations of the parties hereunder shall cease; or

(b)	Purchaser may seek specific performance of this Agreement, provided that Purchaser's right to seek specific performance shall be forfeited if Purchaser does not commence an action for specific performance within three (3) months after the end of such thirty (30) day period.

If the transaction described in this Agreement is not consummated as provided herein on the Closing Date by reason of a default by Purchaser hereunder, then Seller may elect to pursue either of the following remedies:

(a)	If Purchaser fails to cure the default within thirty (30) days after written notice thereof is given to Purchaser by Seller, then Seller may terminate this Agreement by written notice to Purchaser, in which event all further rights and obligations of the parties hereunder shall cease; or

(b)	Seller may seek specific performance of this Agreement, provided that Seller’s right to seek specific performance shall be forfeited if Seller does not commence an action for specific performance within three (3) months after the Closing Date specified in this Agreement.

13. Notice . All notices, demands, requests or other communications made pursuant to, under or by virtue of this Agreement must be in writing and either hand delivered, delivered by overnight courier, or mailed through the United States Postal Service by certified or registered mail, return receipt requested, to the party to which the notice, demand, request or communication is being made, as follows:

To Seller:	Winland Electronics, Inc.
	1950 Excel Drive
	Mankato, MN 56001
	Attention: Brian D. Lawrence

With copy to:	Thomas F. Steichen
	Fredrikson & Byron
	200 South Sixth Street
	Suite 4000
	Minneapolis, MN 55402

To Purchaser:	Nortech Systems Incorporated.
	1120 Wayzata Boulevard East, #201
	Wayzata, MN 55391
	Attention: Richard Wasielewski

With copy to:	Bert M. Gross
	7201 Metro Boulevard
	Edina, Minnesota 55439

14. Time of Essence . Time is of the essence of this Agreement.

15. Brokers . Each party represents and warrants to each other that they have not dealt with a real estate broker or agent in connection with this transaction.

16. Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

17. Assignability . Purchaser may assign its rights under this Agreement. No such assignment will relieve Purchaser of its obligations under this Agreement.

18. Binding Effect . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and permitted assigns.

19. Modifications; Waiver . No waiver, modification amendment, discharge or change of this Agreement shall be valid unless the same is in writing and signed by the party against which the enforcement of such modification, waiver, amendment, discharge or change is sought.

20. Entire Agreement . This Agreement contains the entire agreement between the parties relating to the transactions contemplated hereby and all prior or contemporaneous agreements, understandings, representations or statements, oral or written, are superseded hereby.

21. Attorney Fees . In the event either party retains the services of an attorney to successfully enforce its rights under this Agreement, then that party shall be entitled to recover, in addition to its other damages, its reasonable attorney's fees, witness fees and other legal costs.

IN WITNESS WHEREOF , the parties have executed this Agreement as of the day and year first above written.

	SELLER:

	WINLAND ELECTRONICS, INC.

	By:	/s/ Brian Lawrence
		Brian D. Lawrence, Chief Financial Officer

	PURCHASER:

	NORTECH SYSTEMS INCORPORATED

	By:	/s/ Richard Wasielewski
		Richard Wasielewski, Chief Financial Officer

EXHIBIT A

LEGAL DESCRIPTION OF PROPERTY

Lots Four (4) and Five (5), Block Three (3), EXCEPT that part of Lot Five (5) lying southerly of a line parallel with and distance 201.90 feet south of the North line of said Lot Five (5), Eastwood Industrial Centre, the five (5) perimeter corners of which subdivision are marked with Judicial Landmarks.

Property ID#: R01.09.10.103.007

- Eastwood Industrial Centre Lot 4 & N201.9’

005 003 00 004.480A

Property ID#: R01.09.10.103.008

- Eastwood Industrial Centre Lot Exc N201.9’

000 003 00 001.680A

Exhibit 10.27

COMMERCIAL BUILDING LEASE

THIS COMMERCIAL BUILDING LEASE (the “ Lease”) is effective as of the 31st day of December, 2012 (the “ Effective Date ”), by and between NORTECH SYSTEMS INCORPORATED, a Minnesota corporation (hereinafter referred to as “ Landlord ”), and WINLAND ELECTRONICS, INC., a Minnesota corporation (hereinafter referred to as “ Tenant ”).

W I T N E S S E T H :

Landlord hereby leases to Tenant, and Tenant leases from Landlord 1,924 square feet of its office and manufacturing facility (the “ Building ”) and improvements (collectively, the “ Improvements ”) located at 1950 Excel Drive, Mankato Minnesota, 56001, which Building and Improvements are hereinafter referred to as the “ Leased Premises. ”

TO HAVE AND TO HOLD the Leased Premises shall be a month-to-month lease beginning on the Effective Date (the “ Term ”), subject to the following terms and conditions. Tenant may terminate this Lease at any time by giving Landlord not less than thirty days’ prior written notice.

ARTICLE 1. RENT . Base rent shall be payable to Landlord without demand, deduction or setoff, at $842.75 per month. Tenant shall pay to Landlord during the Term of this Lease base monthly rent, on the fifth (5 th ) day of each and every month, without demand, deduction, or set-off, during the Term. The Landlord shall be responsible for maintenance, utilities, taxes, insurance and all other payments to third parties as contemplated by this Lease. Each installment of base rent and any additional amounts due under this Lease to be paid to Landlord shall be paid by check, payable to the order of Landlord (or such nominee as shall have been designated by Landlord to receive such payment). A pro rata portion of such monthly base rent shall be due for any partial calendar month during the Term, in proportion to the number of days of such calendar month falling within the Term.

ARTICLE 2. TAXES AND SPECIAL ASSESSMENTS . Landlord shall pay, when due and before penalty attaches, all real estate taxes and installments of special assessments, and any similar charges or liens due and payable during the Term hereof with respect to the Leased Premises and improvements situated thereon, provided that election shall be made to pay any special assessment over the longest period allowed by law. For any partial calendar year within the Term of this Lease, Landlord shall be responsible for a pro rata portion of such taxes and special assessments due and payable in such calendar year in proportion to the number of days of such calendar year falling within the Term, and appropriate adjustments shall be made at the beginning of the Term and at the end of the Term.

ARTICLE 3. MAINTENANCE AND REPAIR . Landlord shall be responsible for maintaining the interior of the Leased Premises, including all interior walls, doors, windows, ceilings, and floors in good condition and repair, reasonable wear and tear and casualty damaged excepted. Landlord shall also make all necessary routine repairs to all building systems serving the Leased Premises, and shall keep all portions of the Leased Premises in a clean and orderly condition, including the sidewalks, curbs, drives, parking areas, landscaped areas, and passageways adjoining the same, which shall be kept free of dirt, rubbish, snow, ice and unlawful obstructions. Landlord shall maintain, repair, and, as necessary, replace during the Term of this Lease, all foundations, structural elements, roofs and roof membranes, and major building systems in good order and repair.

ARTICLE 4. ALTERATIONS AND ADDITIONS . Except for non-structural alterations, additions or improvements (“ Alterations ”) that (i) do not exceed $10,000 in the aggregate, (ii) are not visible from the exterior of the Premises, (iii) do not affect any building system or the structural strength of the Improvements, and (iv) do not require penetrations into the floor, ceiling, roof or walls, Tenant shall not make or permit any Alterations in or to the Leased Premises without first obtaining Landlord’s consent, which consent shall not be unreasonably withheld. With respect to any Alterations made by or on behalf of Tenant requiring Landlord’s consent hereunder: (i) not less than 10 days prior to commencing any such Alteration, Tenant shall deliver to Landlord the plans, specifications and necessary permits for the Alteration, together with certificates evidencing that Tenant’s contractors and subcontractors have adequate insurance coverage naming Landlord as an additional insured, (ii) Tenant shall obtain Landlord’s prior written approval of any contractor or subcontractor, and (iii) complete the Alterations in accordance with the plans and specifications delivered to and approved by Landlord. All Alterations made by or on behalf of Tenant (regardless if Landlord’s consent is required hereunder) shall be constructed with new materials, in a good and workmanlike manner, and in compliance with all laws, regulations, codes and ordinances (collectively, “ Laws ”). Any Alteration by Tenant shall be the property of Tenant until the expiration or termination of this Lease. At the expiration or termination of this Lease, without payment by Landlord, the Alteration shall remain on the property and become the property of Landlord (except for any Alterations which are trade fixtures, which shall remain the property of Tenant), unless Landlord gives notice to Tenant to remove it, in which event Tenant will remove it and will repair any resulting damage. At Tenant’s request prior to Tenant making any Alterations, Landlord will notify Tenant whether Tenant is required to remove the Alterations at the expiration or termination of this Lease. Tenant may install its trade fixtures, furniture and equipment in the Premises, provided that the installation and removal of them will not affect any structural portion of the Improvements, any building system or any other equipment or facilities serving the Improvements.

ARTICLE 5. MECHANIC’S LIENS . Tenant shall promptly pay for any labor, services, materials, supplies or equipment furnished to Tenant in or about the Leased Premises. Tenant shall keep the Leased Premises free from any liens arising out of any labor, services, materials, supplies or equipment furnished or alleged to have been furnished to Tenant. Tenant shall take all steps permitted by law in order to avoid the imposition of any such lien. Should any such lien or notice of such lien be filed against the Leased Premises, Tenant shall discharge the same by bonding or otherwise within thirty (30) days after Tenant has notice that the lien or claim is filed regardless of the validity of such lien or claim. Landlord shall have the right to post and maintain on the Leased Premises notice of non-responsibility under the laws of Minnesota.

ARTICLE 6. USE OF LEASED PREMISES; COMPLIANCE WITH LAWS; ENVIRONMENTAL COVENANTS . The Leased Premises shall be used and occupied by Tenant for any lawful manufacturing or industrial activity that is permitted in the zoning classification in which the Leased Premises is located, and for no other purpose, and such use and occupancy shall be in compliance with all applicable Laws. Without limiting the foregoing, Tenant shall, at Tenant’s expense, make all such improvements and alterations required by reason of Tenant’s specific use and shall comply with all Environmental Laws as hereinafter provided, and Landlord shall have no responsibility for the same. Tenant shall indemnify, defend and hold harmless Landlord from any loss or liability incurred by reason of any failure by Tenant to comply with applicable Laws in its use and occupancy of the Leased Premises. Notwithstanding the foregoing, Tenant shall not be required to further improve or alter the Leased Premises in order to carry out its obligations under this Article, unless the need to make such improvements is due to Tenant’s specific use of the Leased Premises or a specific act of Tenant. Landlord shall be responsible for and make any alterations or improvements required by applicable Laws not due to Tenant’s specific use or acts. It shall be Tenant’s obligation to obtain any permits or licenses required in connection with Tenant’s use of the Leased Premises.

As used herein, the following terms shall have the following meanings:

“Environmental Laws” – All present or future federal, state or local laws, ordinances, rules or regulations (including the rules and regulations of the federal Environmental Protections Agency and comparable state agency) relating to the protection of human health or the environment.

“Hazardous Materials” – Pollutants, contaminants, toxic or hazardous wastes or other materials the removal of which is required or the use of which is regulated, restricted, or prohibited by any Environmental Law.

Tenant agrees that (i) no activity will be conducted on the Leased Premises that will use or produce any Hazardous Materials, except for activities which are part of the ordinary course of Tenant’s business and are conducted in accordance with all Environmental Laws (“ Permitted Activities ”); (ii) the Premises will not be used for storage of any Hazardous Materials, except for materials used in the Permitted Activities which are properly stored in a manner and location complying with all Environmental Laws; (iii) no portion of the Leased Premises will be used by Tenant or Tenant’s employees, invitees, contractors or agents (“ Tenant’s Agents ”) for disposal of Hazardous Materials; and (iv) Tenant will immediately notify Landlord of any violation by Tenant or Tenant’s Agents of any Environmental Laws or the release or suspected release of Hazardous Materials in, under or about the Leased Premises, and Tenant shall immediately deliver to Landlord a copy of any notice, filing or permit sent or received by Tenant with respect to the foregoing. If at any time during or after the Term, Tenant or Tenant’s Agents causes contamination on any portion of the Leased Premises, Tenant will indemnify, defend and hold Landlord harmless from all claims, demands, actions, liabilities, costs, expenses, attorneys’ fees, damages and obligations of any nature arising from or as a result thereof, and Landlord shall have the right to direct remediation activities, all of which shall be performed at Tenant’s cost. Tenant’s obligations pursuant to this Article 6 shall survive the expiration or termination of this Lease.

ARTICLE 7. UTILITIES . Landlord will pay or cause to be paid when due all charges for gas, water, sewer, electricity, telephone and other utilities and services used, rendered or supplied to, upon or in connection with the Leased Premises, and Tenant shall have no responsibility to supply the same. Without limiting Landlord’s general duty to maintain and repair, Tenant shall maintain in good order and condition during the term and any renewal term of this Lease all pipes, wires, conduits, boilers and other equipment for the provision of utility services to the Leased Premises.

ARTICLE 8. INSURANCE .

(a) Public Liability. At all times during the term and any renewal term of this Lease, Tenant shall keep in full force and effect at its expense a policy or policies of commercial general liability insurance with respect to the Leased Premises and the business of Tenant and any subtenant, licensee or concessionaire, with a company licensed to do business in the State of Minnesota reasonably acceptable to Landlord, in which both Tenant and Landlord shall be named as insureds and adequately covered under reasonable limits of liability not less than $5,000,000.00 combined single limit coverage of bodily injury, property damage or combination thereof. Landlord shall be named as an additional loss payee. Tenant shall furnish Landlord with certificates or other acceptable evidence that such insurance is in effect, which evidence shall state that Landlord shall be notified in writing thirty (30) days prior to cancellation, material change or renewal of insurance.

(b) Hazard Insurance. At all times during the Term, Tenant shall keep in full force and effect a policy of fire and extended coverage insurance on the Improvements (including any Alterations therein or thereto) for its full insurable replacement cost, with a company licensed to do business in the State of Minnesota reasonably acceptable to Landlord, naming both Landlord and Tenant as insureds, but payable only to Landlord and containing a loss payable clause as required by any mortgagees of the Leased Premises; and shall furnish Landlord and all such mortgagees with certificates or other acceptable evidence that such insurance is in effect, which evidence shall state that Landlord and all such mortgagees shall be notified in writing thirty (30) days prior to cancellation, material change or renewal of insurance. Tenant may separately or under the same policy insure any trade fixtures, equipment, supplies and other personal property owned by Tenant and located upon the Leased Premises.

(c) Waiver of Subrogation. Notwithstanding anything to the contrary in this Lease, Landlord and Tenant each waive, and release each other from and against, all claims for recovery against the other for any loss or damage to the property of such party arising out of fire or other casualty coverable by a standard fire and extended coverage property insurance policy , even if such loss or damage shall be brought about by the fault or negligence of the other party or its employees or agents. This waiver and release is effective regardless of whether the releasing party actually maintains the insurance described above in this subsection and is not limited to the amount of insurance actually carried, or to the actual proceeds received after a loss. Each party shall have its insurance company that issues its property coverage waive any rights of subrogation, and shall have the insurance company include an endorsement acknowledging this waiver, if necessary. Tenant assumes all risk of damage of Tenant’s property within the Leased Premises, including any loss or damage caused by water leakage, fire, windstorm, explosion, theft, or other cause.

ARTICLE 9. NON-LIABILITY; COVENANTS TO HOLD HARMLESS . Except to the extent caused by the negligence or intentional misconduct of Landlord, its agents, or employees, Landlord shall be held harmless by Tenant from any liability for damages to any person or property in or upon the Leased Premises and the sidewalks adjoining same, including the property of Tenant and its employees and all persons in the Leased Premises at its or their invitation. All property kept, stored or maintained in the Leased Premises shall be so kept, stored or maintained at the sole risk of Tenant. Tenant shall be held harmless by Landlord for any damages to person or property caused by the negligence or intentional misconduct of Landlord, its agents, or employees. Tenant’s and Landlord’s obligations under this Article 9 shall survive the expiration or earlier termination of this Lease.

ARTICLE 10. EMINENT DOMAIN .

(a) Entire Premises. If substantially all of the Leased Premises shall be taken under the power of eminent domain then the term of this Lease shall cease as of the day possession shall be taken and the rent shall be paid up to that day with a proportionate refund by Landlord of such rent as may have been paid in advance.

(b) Partial Taking. If more than twenty percent (20%) of the floor space in the Leased Premises shall be taken under the power of eminent domain, both Landlord and Tenant shall have the right to terminate this Lease as of the day possession shall be taken by notice to the other party given within ten (10) days after possession is so taken. If the unexpired portion of the Term shall be one (1) year or less at the date of taking of any portion of the Leased Premises, Landlord shall have the right to terminate this Lease as of the day possession shall be taken by like notice to Tenant. Tenant shall be allowed a reasonable time not to exceed ten (10) days after any such termination to vacate the remainder of the Leased Premises, and rent shall be paid up to the day possession shall be taken or the day Tenant vacates the remainder of the Leased Premises, whichever is later.

(c) Continuation of Lease. In the event this Lease is not terminated pursuant to paragraphs (a) or (b) of this Article, all the terms of this Lease shall continue in effect, except that the base rent shall be reduced in proportion to the reduction in floor space in the Leased Premises as a result of the taking, and Landlord shall, at its own cost and expense, make all necessary repairs or alterations to the Improvements so as to constitute the remaining Leased Premises a complete architectural unit.

(d) Damages. In any event all damages awarded for such taking under the power of eminent domain, whether for the whole or a part of the Leased Premises, shall belong to and be the property of Landlord whether such damages shall be awarded as compensation for diminution in value to the leasehold or to the fee of the premises; provided, however, that Landlord shall not be entitled to any award made separately to Tenant for relocation benefits, for “going concern” value of its business, loss of business, fair value of, and cost of removal of stock and fixtures, which shall belong to Tenant.

(e) Definition. The term “eminent domain” shall include the exercise of any similar power and any purchase or other acquisition in lieu of condemnation.

ARTICLE 11. DAMAGE .

(a) Partial or Total Destruction. In case the Leased Premises shall be partially or totally destroyed by fire or other casualty insurable under fire and extended casualty insurance so as to become partially or totally untenantable, the same, unless Landlord or Tenant shall terminate this Lease as hereinafter provided, shall be repaired or rebuilt as quickly as practicable at the cost and direction of Landlord, and the base rent shall abate during the period of repair in proportion to the portion of the floor space in the Leased Premises that is untenantable or unfit for use by Tenant in its business.

(b) Extensive Damage; Election. If the Improvements located on the Leased Premises shall be destroyed or damaged by fire or other casualty insurable under fire and extended casualty insurance, so as to become wholly untenantable, and:

1. the Leased Premises cannot be repaired or restored within one hundred twenty days (120) after such damage or destruction; or

2. the unexpired portion of the term or any renewal term of this Lease is one (1) year or less at the date of the damage;

then either Landlord or Tenant may terminate this Lease as of the date of such destruction or damage by giving written notice to the other party of such election within thirty (30) days after such damage or destruction.

ARTICLE 12. SURRENDER; HOLDING OVER . On the last day of the term or any renewal term hereof or on the sooner termination thereof, Tenant shall peaceably surrender the Leased Premises in good order, condition and repair, broom-clean, casualty damage and reasonable wear and tear only excepted. Tenant shall repair any damage to the Leased Premises caused by removal of Tenant’s trade fixtures or equipment. Any of Tenant’s property not removed on the last day of the term or any renewal term hereof or on the sooner termination thereof, shall be deemed abandoned. In the event Tenant remains in possession of the Leased Premises after the expiration of the Term without the execution of a new lease, Tenant’s occupancy of the Premises shall be that of a tenancy at will. Tenant’s occupancy during any holdover period shall otherwise be subject to the provisions of this Lease (unless clearly inapplicable), except that the base rent shall be 125% of the base rent payable for the last full month immediately preceding the holdover. No holdover or payment by Tenant after the expiration or termination of this Lease shall operate to extend the Term or prevent Landlord from immediate recovery of possession of the Leased Premises by summary proceedings or otherwise. Tenant shall be liable for all damages that Landlord suffers as a result of the holdover.

ARTICLE 13. DEFAULT; REMEDIES .

(a) Default. The occurrence of any of the following shall constitute an “ Event of Default ” under this Lease:

1. Tenant shall fail to pay any installment of base rent to Landlord within ten (10) days after the due date;

2. Tenant shall have failed to comply with any other provision of this Lease, and shall not have cured such failure within thirty (30) days after Landlord, by written notice, has informed Tenant of such noncompliance; provided, however, in the case of a default which cannot be cured, with due diligence, within a period of thirty (30) days, Tenant shall have such additional time to cure such default as may be reasonably necessary, provided that Tenant proceeds promptly and with due diligence to cure such default after receipt of said notice;

3. Tenant shall have filed a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee for it or its property, or any similar petition, or shall have made an assignment for the benefit of creditors, or an order for relief shall have been entered in any proceeding under the federal Bankruptcy Code in which Tenant is named as the debtor;

4. Any involuntary petition of the type or similar to those referred to in Paragraph 3 of this Subsection (a) shall have been filed against Tenant, and shall not be vacated or withdrawn within sixty (60) days after the date of the filing thereof; or

5. Tenant shall have abandoned the Leased Premises, which shall be conclusively presumed if Tenant shall vacate the premises for thirty (30) days without giving written notice of its intent to return to possession of the Leased Premises.

(b) Remedies. Whenever any event of default shall have occurred and be subsisting, Landlord may elect either:

1. To cancel and terminate this Lease; or

2. To reenter and take possession of the Leased Premises, and terminate Tenant’s right to possession of the Leased Premises, without terminating this Lease or any of Tenant’s obligations for the balance of the term of this Lease.

Landlord may at any time elect to terminate this Lease despite a prior election to exercise its remedies under Paragraph 2 above. In the event Landlord exercises its remedies under Paragraph 2 above, it may remove all persons and property from the Leased Premises and store such property at the cost of and for the account of Tenant, may make alterations and repairs and redecorate the premises to the extent deemed by Landlord necessary or desirable, and may relet the premises, or any part thereof, for the account of Tenant, to any person, firm or corporation, other than Tenant, for such rent, for such time and upon such terms as Landlord, in Landlord’s sole discretion, shall determine; but Landlord shall not be required to accept any tenant offered by Tenant or to observe any instruction given by Tenant concerning such reletting. Any rent and other amounts received by Landlord upon such reletting shall be applied first to the costs and expenses of Landlord in regaining possession of the Leased Premises, storing property removed from the premises, making alterations or repairs or redecorating the Leased Premises, and reletting the premises, including, without limitation, brokerage and reasonable attorneys fees, then to the rentals and other obligations of Tenant under this Lease, and any surplus shall be paid to Tenant.

ARTICLE 14. NOTICES . Any notice required or permitted under this Lease shall be deemed sufficiently given or served when personally delivered (in person, by commercial courier service, by facsimile with confirmed transmission, or otherwise) or forty-eight (48) hours after mailed by registered or certified mail to Tenant at the address of the Leased Premises and to Landlord at the address then fixed for the payment of rent, and either party may by like written notice at any time designate a different address to which notices shall subsequently be sent.

ARTICLE 15. GENERAL . This Lease does not create the relationship of principal and agent or of partnership or of joint venture or of any association between Landlord and Tenant, the sole relationship between Landlord and Tenant being that of Landlord and Tenant. One or more waivers of any default of Tenant by Landlord shall not be construed as a waiver of a subsequent breach of the same covenant, term or condition. The consent to or approval by Landlord of any act by Tenant requiring Landlord’s consent or approval shall not waive or render unnecessary Landlord’s consent to or approval of any subsequent similar act by Tenant. Each term and each provision of this Lease performable by Tenant shall be construed to be both a covenant and a condition. The marginal or topical headings of the several articles, paragraphs and clauses are for convenience only and do not define, limit or construe the contents of such articles, paragraphs or clauses. All preliminary negotiations and all prior written agreements regarding the subject matter of this Lease are superseded and merged into and incorporated in this Lease. The laws of the State of Minnesota shall govern the validity, performance and enforcement of this Lease. The terms, covenants and conditions hereof shall be binding upon and inure to the benefit of the successors in interest and assigns of the parties hereto. This Lease may be executed in counterparts, each of which will be deemed an original, but all of which together will constitute one and the same written action.

ARTICLE 16. QUIET ENJOYMENT . Landlord covenants and agrees with Tenant that upon Tenant paying the rent and performing all of the terms and conditions on Tenant’s part to be observed and performed, Tenant may peaceably and quietly enjoy the premises hereby leased, subject, nevertheless, to the terms and conditions of this Lease and subject to covenants, conditions, restrictions and easements of record, if any.

ARTICLE 17. SUBORDINATION . Tenant agrees that its interest in the Leased Premises is and shall be subordinate to any mortgages that may hereafter be placed upon said premises and to any and all advances to be made thereunder, and to the interest thereon and all renewals, replacements and extensions thereof, provided the mortgagee named in said mortgages shall agree not to disturb Tenant’s occupancy under this Lease in the event of foreclosure if Tenant is not in default beyond applicable periods of grace. Tenant agrees to execute such documents as may be reasonably required by such mortgagee to confirm the same. In the event that any mortgagee elects to have the Lease a prior lien to its mortgage, then and in such event upon such mortgagee notifying Tenant to that effect, this Lease shall be deemed prior in lien to the said mortgage, whether this Lease is dated prior to or subsequent to the date of said mortgage.

ARTICLE 18. ASSIGNMENT AND SUBLETTING . Landlord may freely transfer the Leased Premises, subject to this Lease, and/or assign its rights under this Lease. Upon any transfer of the Leased Premises, subject to this Lease, Landlord shall be relieved of all of its obligations under this Lease. Tenant shall not assign this Lease or sublease all or part of the Leased Premises (voluntarily, by operation of law or otherwise) without the prior written consent of Landlord, which consent shall not be unreasonably withheld.

ARTICLE 19. NO RECORDING OF LEASE . The parties agree not to record or register this Lease. At the request of either party, or such party’s lender, a memorandum of this Lease in form mutually acceptable to the parties may be recorded.

IN WITNESS, the Landlord and the Tenant have caused this Lease to be executed as of the day and year first above written.

	NORTECH SYSTEMS INCORPORATED

	By:	/s/ Richard Wasielewski

	Its:	Chief Financial Officer

	WINLAND ELECTRONICS, INC.

	By:	/s/ Brian Lawrence

	Its:	Chief Financial Officer and Senior Vice President

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements on Form S-8, No. 333-159859, 333-153377, 333-153378 and 333-126061 of Winland Electronics, Inc. of our report dated March 22, 2013, relating to the financial statements, which appears on page 15 of this annual report on Form 10-K for the year ended December 31, 2012.

/s/ BAKER TILLY VIRCHOW KRAUSE, LLP

Minneapolis, Minnesota

March 22, 2013

EXHIBIT 31.1

SARBANES-OXLEY SECTION 302 CERTIFICATION

I, David A. Gagne, certify that:

1. I have reviewed this Form 10-K of Winland Electronics, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statement for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: March 22, 2013	/s/ David A. Gagne
	David A. Gagne
	Chief Executive Officer

EXHIBIT 31.2

SARBANES-OXLEY SECTION 302 CERTIFICATION

I, Brian D. Lawrence, certify that:

1. I have reviewed this Form 10-K of Winland Electronics, Inc.;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: March 22, 2013	/s/ Brian D. Lawrence
	Brian D. Lawrence
	Chief Financial Officer and Senior Vice President

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Winland Electronics, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission (the “Report”), I, David A. Gagne, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 22, 2013	/s/ David A. Gagne
	David A. Gagne
	Chief Executive Officer

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Winland Electronics, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission (the “Report”), I, Brian D. Lawrence, Chief Financial Officer and Senior Vice President of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 22, 2013	/s/ Brian D. Lawrence
	Brian D. Lawrence
	Chief Financial Officer and Senior Vice President