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EXHIBIT 10.1

WINLAND ELECTRONICS, INC.

2005 EQUITY INCENTIVE PLAN

SECTION 1.

DEFINITIONS

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

     (a) “Administrator” shall mean the Board or the Committee, as the case may be.

     (b) “Affiliate” shall mean a Parent or Subsidiary of the Company.

     (c) “Award” shall mean any grant of an Option, Restricted Stock Award, Stock Appreciation
Right or Performance Award.

     (d) “Committee” shall mean a Committee of two or more directors who shall be appointed by and
serve at the pleasure of the Board. If the Company’s securities are registered pursuant to Section
12 of the Securities Exchange Act of 1934, as amended, then, to the extent necessary for compliance
with Rule 16b-3, or any successor provision, each of the members of the Committee shall be a
“non-employee director.” Solely for purposes of this Section 1(a), “non-employee director” shall
have the same meaning as set forth in Rule 16b-3, or any successor provision, as then in effect, of
the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. Further,
to the extent necessary for compliance with the limitations set forth in Internal Revenue Code
Section 162(m), each of the members of the Committee shall be an “outside director” within the
meaning of Code Section 162(m) and the regulations issued thereunder.

     (e) The “Company” shall mean Winland Electronics, Inc., a Minnesota corporation.

     (f) “Fair Market Value” as of any date shall mean (i) if such stock is listed on the Nasdaq
National Market, Nasdaq SmallCap Market, or an established stock exchange, the price of such stock
at the close of the regular trading session of such market or exchange on such date, as reported by
The Wall Street Journal or a comparable reporting service, or, if no sale of such stock
shall have occurred on such date, on the next preceding day on which there was a sale of stock;
(ii) if such stock is not so listed on the Nasdaq National Market, Nasdaq SmallCap Market, or an
established stock exchange, the average of the closing “bid” and “asked” prices quoted by the OTC
Bulletin Board, the National Quotation Bureau, or any comparable reporting service on such date or,
if there are no quoted “bid” and “asked” prices on such date, on the next preceding date for which
there are such quotes; or (iii) if such stock is not publicly traded as of such date, the per share
value as determined by the Board, or the Committee, in its sole discretion by applying principles
of valuation with respect to the Company’s Common Stock.

     (g) The “Internal Revenue Code” is the Internal Revenue Code of 1986, as amended from time to
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     (h) “Non-Employee Director” shall mean members of the Board who are not employees of the
Company or any subsidiary.

     (i) “Option” means an incentive stock option or nonqualified stock option granted pursuant to
the Plan.

     (j) “Option Stock,” “Stock” or “Common Stock” shall mean Common Stock of the Company (subject
to adjustment as described in Section 14) reserved for Options, Restricted Stock Awards, Stock
Appreciation Rights and Performance Shares pursuant to this Plan.

     (k) “Parent” shall mean any corporation which owns, directly or indirectly in an unbroken
chain, fifty percent (50%) or more of the total voting power of the Company’s outstanding stock.

     (l) The “Participant” means a key employee of the Company or any Subsidiary to whom an
incentive stock option has been granted pursuant to Section 9; a consultant or advisor to, or
director (including a Non-Employee Director), key employee or officer, of the Company or any
Subsidiary to whom a nonqualified stock option has been granted pursuant to Section 10; a
Non-Employee Director to whom a nonqualified stock option has been granted pursuant to Section 14;
or a consultant or advisor to, or director, key employee or officer, of the Company or any
Subsidiary to whom a Restricted Stock Award has been granted pursuant to Section 11; or a
consultant or advisor to, or director, key employee or officer, of the Company or any Subsidiary to
whom a Performance Award has been granted pursuant to Section 12; or a consultant or advisor to, or
director, key employee or officer, of the Company or any Subsidiary to whom a Stock Appreciation
Right has been granted pursuant to Section 13.

     (m) “Performance Award” shall mean any Performance Shares or Performance Units granted
pursuant to Section 12 hereof.

     (n) “Performance Period” shall mean the period, established at the time any Performance Award
is granted or at any time thereafter, during which any performance goals specified by the
Administrator with respect to such Performance Award are to be measured.

     (o) “Performance Share” shall mean any grant pursuant to Section 12 hereof of an award, which
value, if any, shall be paid to a Participant by delivery shares of Common Stock of the Company
upon achievement of such performance goals during the Performance Period as the Administrator shall
establish at the time of such grant or thereafter.

     (p) “Performance Unit” shall mean any grant pursuant to Section 12 hereof of an award, which
value, if any, shall be paid to a Participant by delivery of cash upon achievement of such
performance goals during the Performance Period as the Administrator shall establish at the time of
such grant or thereafter.

     (q) The “Plan” means the Winland Electronics, Inc. 2005 Equity Incentive Plan, as amended
hereafter from time to time, including the form of Agreements as they may be modified by the
Administrator from time to time.

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     (r) “Restricted Stock Award” shall mean any grant of restricted shares of Common Stock of the
Company pursuant to Section 11 hereof.

     (s) “Stock Appreciation Right” shall mean a grant pursuant to Section 13 hereof.

     (t) A “Subsidiary” shall mean any corporation of which fifty percent (50%) or more of the
total voting power of outstanding stock is owned, directly or indirectly in an unbroken chain, by
the Company.

SECTION 2.

PURPOSE

     The purpose of the Plan is to promote the success of the Company and its Subsidiaries by
facilitating the employment and retention of competent personnel and by furnishing incentive to
officers, directors, employees, consultants, and advisors upon whose efforts the success of the
Company and its Subsidiaries will depend to a large degree.

     It is the intention of the Company to carry out the Plan through the granting of Options which
will qualify as “incentive stock options” under the provisions of Section 422 of the Internal
Revenue Code, or any successor provision, pursuant to Section 9 of this Plan, through the granting
of Options that are “nonqualified stock options” pursuant to Sections 10 and 14 of this Plan,
through the granting of Restricted Stock Awards pursuant to Section 11 of this Plan, through the
granting of Performance Awards pursuant to Section 12 of this Agreement and through the granting of
Stock Appreciation Rights pursuant to Section 13 hereof. Adoption of this Plan shall be and is
expressly subject to the condition of approval by the shareholders of the Company within twelve
(12) months before or after the adoption of the Plan by the Board of Directors. In no event shall
any Options, Restricted Stock Awards, Performance Awards or Stock Appreciation Rights be granted
prior to the date this Plan is approved by the shareholders of the Company.

SECTION 3.

EFFECTIVE DATE OF PLAN

     The Plan shall be effective as of the date of adoption by the Board of Directors, subject to
approval by the shareholders of the Company as required in Section 2.

SECTION 4.

ADMINISTRATION

     The Plan shall be administered by the Board of Directors of the Company (hereinafter referred
to as the “Board”) or by a Committee which may be appointed by the Board from time to time to
administer the Plan (hereinafter collectively referred to as the “Administrator”). Except as
otherwise provided herein, the Administrator shall have all of the powers vested in it under the
provisions of the Plan, including but not limited to exclusive authority to determine, in its sole
discretion, whether an Award shall be granted; the individuals to whom, and the time or

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times at which, such Awards shall be granted; the number of shares subject to each such Award, the
performance criteria, if any, and any other terms and conditions of each Award. The Administrator
shall have full power and authority to administer and interpret the Plan, to make and amend rules,
regulations and guidelines for administering the Plan, to prescribe the form and conditions of the
respective Awards (which may vary from Participant to Participant) evidencing each Award, and to
make all other determinations necessary or advisable for the administration of the Plan. The
Administrator’s interpretation of the Plan, and all actions taken and determinations made by the
Administrator pursuant to the power vested in it hereunder, shall be conclusive and binding on all
parties concerned.

     No member of the Board or the Committee shall be liable for any action taken or determination
made in good faith in connection with the administration of the Plan. In the event the Board
appoints a Committee as provided hereunder, any action of the Committee with respect to the
administration of the Plan shall be taken pursuant to a majority vote of the Committee members or
pursuant to the written resolution of all Committee members.

SECTION 5.

PARTICIPANTS

     The Administrator shall from time to time, at its discretion and without approval of the
shareholders, designate those employees, officers, directors, consultants, and advisors of the
Company or of any Subsidiary to whom Awards shall be granted under this Plan; provided, however,
that consultants or advisors shall not be eligible to receive Awards hereunder unless such
consultant or advisor renders bona fide services to the Company or Subsidiary and such services are
not in connection with the offer or sale of securities in a capital raising transaction and do not
directly or indirectly promote or maintain a market for the Company’s securities. The
Administrator shall, from time to time, at its discretion and without approval of the shareholders,
designate those employees of the Company or any Subsidiary to whom Awards shall be granted under
this Plan; provided, however, that Non-Employee Directors will be granted nonqualified stock
options pursuant to Section 14 of the Plan without any further action by the Administrator. The
Administrator may grant additional Awards under this Plan to some or all Participants then holding
Awards, or may grant Awards solely or partially to new Participants. In designating Participants,
the Administrator shall also determine the number of shares subject to each Award granted to each
Participant and, with respect to Performance Awards, the performance criteria applicable to each
Participant. The Administrator may from time to time designate individuals as being ineligible to
participate in the Plan.

SECTION 6.

STOCK

     The capital stock to be issued under this Plan shall consist of authorized but unissued shares
of Stock. Four Hundred Thousand (400,000) shares of Stock shall be reserved and available for
Awards under the Plan; provided, however, that the total number of shares of Stock reserved for
Awards under this Plan shall be subject to adjustment as provided in Section 15 of the Plan. In
the event that any outstanding Option, Stock Appreciation Right, Performance Share Award or
Restricted Stock Award under the Plan for any reason expires or is terminated prior to

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the exercise of the Option or Stock Appreciation Right, prior to the achievement of the performance
criteria under the Performance Share Award, or prior to the lapsing of the risks of forfeiture on
the Restricted Stock Award, the shares of Stock allocable to the unexercised portion of such Option
or Stock Appreciation Right, to the unearned portion of the Performance Share Award or to the
forfeited portion of the Restricted Stock Award shall continue to be reserved for Options, Stock
Appreciation Rights, Performance Share Awards and Restricted Stock Awards under the Plan and may be
optioned or awarded hereunder.

SECTION 7.

DURATION OF PLAN

     Incentive stock options may be granted pursuant to the Plan from time to time during a period
of ten (10) years from the effective date as defined in Section 3. Other Awards may be granted
pursuant to the Plan from time to time after the effective date of the Plan and until the Plan is
discontinued or terminated by the Board.

SECTION 8.

PAYMENT 

     Participants may pay for shares of Stock of the Company upon exercise of Options granted
pursuant to this Plan with cash, personal check, certified check or, if approved by the
Administrator in its sole discretion, previously-owned shares of the Company’s Common Stock, or any
combination thereof, or such other form of payment as may be authorized by the Administrator. Any
Stock so tendered as part of such payment shall be valued at such Stock’s then Fair Market Value.
The Administrator may, in its sole discretion, limit the forms of payment available to the
Participant and may exercise such discretion any time prior to the termination of the Option
granted to the Participant or upon any exercise of the Option by the Participant.
“Previously-owned shares” means shares of the Company’s Common Stock which the Participant has
owned for at least six (6) months prior to the exercise of the stock option, or for such other
period of time as may be required by generally accepted accounting principles.

     With respect to payment in the form of Common Stock of the Company, the Administrator may
require advance approval or adopt such rules as it deems necessary to assure compliance with Rule
16b-3, or any successor provision, as then in effect, of the General Rules and Regulations under
the Securities Exchange Act of 1934, if applicable.

SECTION 9.

TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS

     Each incentive stock option granted pursuant to this Section 9 shall be evidenced by a written
stock option agreement (the “Option Agreement”). The Option Agreement shall be in such form as may
be approved from time to time by the Administrator and may vary from Participant to Participant;
provided, however, that each Participant and each Option Agreement shall comply with and be subject
to the following terms and conditions:

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     (a) Number of Shares and Option Price. The Option Agreement shall state the total
number of shares covered by the incentive stock option. Except as permitted by Section 424(d) of
the Internal Revenue Code, or any successor provision, the option price per share shall not be less
than one hundred percent (100%) of the per share Fair Market Value of the Company’s Common Stock on
the date the Administrator grants the option; provided, however, that if a Participant owns stock
possessing more than ten percent (10%) of the total combined voting power of all classes of stock
of the Company or of its Parent or any Subsidiary, the option price per share of an incentive stock
option granted to such Participant shall not be less than one hundred ten percent (110%) of the per
share Fair Market Value of the Company’s Common Stock on the date of the grant of the option. The
Administrator shall have full authority and discretion in establishing the option price and shall
be fully protected in so doing.

     (b) Term and Exercisability of Incentive Stock Option. The term during which any
incentive stock option granted under the Plan may be exercised shall be established in each case by
the Administrator. In no event shall any incentive stock option be exercisable during a term of
more than ten (10) years after the date on which it is granted; provided, however, that if a
Participant owns stock possessing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or of its Parent or any Subsidiary, the incentive stock option
granted to such Participant shall be exercisable during a term of not more than five (5) years
after the date on which it is granted.

          The Option Agreement shall state when the incentive stock option becomes exercisable and shall
also state the maximum term during which such option may be exercised. In the event an incentive
stock option is exercisable immediately, the manner of exercise of such option in the event it is
not exercised in full immediately shall be specified in the Option Agreement. The Administrator
may accelerate the exercisability of any incentive stock option granted hereunder which is not
immediately exercisable as of the date of grant.

     (c) Nontransferability. No incentive stock option shall be transferable, in whole or
in part, by the Participant other than by will or by the laws of descent and distribution. During
the Participant’s lifetime, the incentive stock option may be exercised only by the Participant.
If the Participant shall attempt any transfer of any incentive stock option granted under the Plan
during the Participant’s lifetime, such transfer shall be void and the incentive stock option, to
the extent not fully exercised, shall terminate.

     (d) No Rights as Shareholder. A Participant (or the Participant’s successor or
successors) shall have no rights as a shareholder with respect to any shares covered by an
incentive stock option until the date of the issuance of a stock certificate evidencing such
shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash,
securities or other property), distributions or other rights for which the record date is prior to
the date such stock certificate is actually issued (except as otherwise provided in Section 15 of
the Plan).

     (e) Withholding. The Company or its Affiliate shall be entitled to withhold and
deduct from future wages of the Participant all legally required amounts necessary to satisfy any
and all withholding and employment-related taxes attributable to the Participant’s exercise of an
incentive stock option or a “disqualifying disposition” of shares acquired through the exercise of
an incentive stock option as defined in Code Section 421(b). In the event the Participant is
required under the Option Agreement to pay the Company or its Affiliate, or make arrangements

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satisfactory to the Company or its Affiliate respecting payment of, such withholding and
employment-related taxes, the Administrator may, in its discretion and pursuant to such rules as it
may adopt, permit the Participant to satisfy such obligation, in whole or in part, by electing to
have the Company or its Affiliate withhold shares of Option Stock otherwise issuable to the
Participant as a result of the exercise of the incentive stock option having a Fair Market Value
equal to the minimum required tax withholding, based on the minimum statutory withholding rates for
federal and state tax purposes, including payroll taxes, that are applicable to the supplemental
income resulting from such exercise. In no event may the Company or its Affiliate withhold shares
having a Fair Market Value in excess of such statutory minimum required tax withholding. The
Participant’s election to have shares withheld for this purpose shall be made on or before the date
the incentive stock option is exercised or, if later, the date that the amount of tax to be
withheld is determined under applicable tax law. Such election shall be approved by the
Administrator and otherwise comply with such rules as the Administrator may adopt to assure
compliance with Rule 16b-3, or any successor provision, as then in effect, of the General Rules and
Regulations under the Securities Exchange Act of 1934, if applicable.

     (f) Other Provisions. The Option Agreement authorized under this Section 9 shall
contain such other provisions as the Administrator shall deem advisable. Any such Option Agreement
shall contain such limitations and restrictions upon the exercise of the Option as shall be
necessary to ensure that such Option will be considered an “incentive stock option” as defined in
Section 422 of the Internal Revenue Code or to conform to any change therein.

SECTION 10.

TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS

     Each nonqualified stock option granted pursuant to this Section 10 shall be evidenced by a
written Option Agreement. The Option Agreement shall be in such form as may be approved from time
to time by the Administrator and may vary from Participant to Participant; provided, however, that
each Participant and each Option Agreement shall comply with and be subject to the following terms
and conditions:

     (a) Number of Shares and Option Price. The Option Agreement shall state the total
number of shares covered by the nonqualified stock option. Unless otherwise determined by the
Administrator, the option price per share shall be one hundred percent (100%) of the per share Fair
Market Value of the Company’s Common Stock on the date the Administrator grants the option.

     (b) Term and Exercisability of Nonqualified Stock Option. The term during which any
nonqualified stock option granted under the Plan may be exercised shall be established in each case
by the Administrator. The Option Agreement shall state when the nonqualified stock option becomes
exercisable and shall also state the maximum term during which such option may be exercised. In
the event a nonqualified stock option is exercisable immediately, the manner of exercise of such
option in the event it is not exercised in full immediately shall be specified in the Option
Agreement. The Administrator may accelerate the exercisability of any nonqualified stock option
granted hereunder which is not immediately exercisable as of the date of grant.

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     (c) Transferability. The Administrator may, in its sole discretion, permit the
Participant to transfer any or all nonqualified stock options to any member of the Participant’s
“immediate family” as such term is defined in Rule 16a-1(e) promulgated under the Securities
Exchange Act of 1934, or any successor provision, or to one or more trusts whose beneficiaries are
members of such Participant’s “immediate family” or partnerships in which such family members are
the only partners; provided, however, that the Participant cannot receive any consideration for the
transfer and such transferred nonqualified stock option shall continue to be subject to the same
terms and conditions as were applicable to such nonqualified stock option immediately prior to its
transfer.

     (d) No Rights as Shareholder. A Participant (or the Participant’s successor or
successors) shall have no rights as a shareholder with respect to any shares covered by a
nonqualified stock option until the date of the issuance of a stock certificate evidencing such
shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash,
securities or other property), distributions or other rights for which the record date is prior to
the date such stock certificate is actually issued (except as otherwise provided in Section 15 of
the Plan).

     (e) Withholding. The Company or its Affiliate shall be entitled to withhold and
deduct from future wages of the Participant all legally required amounts necessary to satisfy any
and all withholding and employment-related taxes attributable to the Participant’s exercise of a
nonqualified stock option. In the event the Participant is required under the Option Agreement to
pay the Company or its Affiliate, or make arrangements satisfactory to the Company or its Affiliate
respecting payment of, such withholding and employment-related taxes, the Administrator may, in its
discretion and pursuant to such rules as it may adopt, permit the Participant to satisfy such
obligation, in whole or in part, by electing to have the Company or its Affiliate withhold shares
of Option Stock otherwise issuable to the Participant as a result of the exercise of the
nonqualified stock option having a Fair Market Value equal to the minimum required tax withholding,
based on the minimum statutory withholding rates for federal and state tax purposes, including
payroll taxes, that are applicable to the supplemental income resulting from such exercise. In no
event may the Company or its Affiliate withhold shares having a Fair Market Value in excess of such
statutory minimum required tax withholding. The Participant’s election to have shares withheld for
this purpose shall be made on or before the date the nonqualified stock option is exercised or, if
later, the date that the amount of tax to be withheld is determined under applicable tax law. Such
election shall be approved by the Administrator and otherwise comply with such rules as the
Administrator may adopt to assure compliance with Rule 16b-3, or any successor provision, as then
in effect, of the General Rules and Regulations under the Securities Exchange Act of 1934, if
applicable.

     (f) Other Provisions. The Option Agreement authorized under this Section 10 shall
contain such other provisions as the Administrator shall deem advisable.

SECTION 11.

RESTRICTED STOCK AWARDS

     Each Restricted Stock Award granted pursuant to this Section 11 shall be evidenced by a
written restricted stock agreement (the “Restricted Stock Agreement”). The Restricted Stock
Agreement shall be in such form as may be approved from time to time by the Administrator and

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may vary from Participant to Participant; provided, however, that each Participant and each
Restricted Stock Agreement shall comply with and be subject to the following terms and conditions:

     (a) Number of Shares. The Restricted Stock Agreement shall state the total number of
shares of Stock covered by the Restricted Stock Award.

     (b) Risks of Forfeiture. The Restricted Stock Agreement shall set forth the risks of
forfeiture, if any, which shall apply to the shares of Stock covered by the Restricted Stock Award,
and shall specify the manner in which such risks of forfeiture shall lapse. The Administrator may,
in its sole discretion, modify the manner in which such risks of forfeiture shall lapse but only
with respect to those shares of Stock which are restricted as of the effective date of the
modification.

     (c) Issuance of Restricted Shares. The Company shall cause to be issued one or more
stock certificates representing such shares of Stock in the Participant’s name, and shall hold each
such certificate until such time as the risk of forfeiture and other transfer restrictions set
forth in the Participant’s Restricted Stock Agreement have lapsed with respect to the shares
represented by the certificate. The Company may place a legend on such certificates describing the
risks of forfeiture and other transfer restrictions set forth in the Participant’s Restricted Stock
Agreement and providing for the cancellation of such certificates if the shares of Stock subject to
the Restricted Stock Award are forfeited.

     (d) Rights as Shareholder. Until the risks of forfeiture have lapsed or the shares
subject to such Restricted Stock Award have been forfeited, the Participant shall be entitled to
vote the shares of Stock represented by such stock certificates and shall receive all dividends
attributable to such shares, but the Participant shall not have any other rights as a shareholder
with respect to such shares.

     (e) Withholding Taxes. The Company or its Affiliate shall be entitled to withhold and
deduct from future wages of the Participant all legally required amounts necessary to satisfy any
and all withholding and employment-related taxes attributable to the Participant’s Restricted Stock
Award. In the event the Participant is required under the Restricted Stock Agreement to pay the
Company or its Affiliate, or make arrangements satisfactory to the Company or its Affiliate
respecting payment of, such withholding and employment-related taxes, the Administrator may, in its
discretion and pursuant to such rules as it may adopt, permit the Participant to satisfy such
obligations, in whole or in part, by delivering shares of Common Stock, including shares of Stock
received pursuant to a Restricted Stock Award on which the risks of forfeiture have lapsed. Such
shares shall have a Fair Market Value equal to the minimum required tax withholding, based on the
minimum statutory withholding rates for federal and state tax purposes, including payroll taxes,
that are applicable to the supplemental income resulting from the lapsing of the risks of
forfeiture on such Restricted Stock. In no event may the Participant deliver shares having a Fair
Market Value in excess of such statutory minimum required tax withholding. The Participant’s
election to deliver shares of Common Stock for this purpose shall be made on or before the date
that the amount of tax to be withheld is determined under applicable tax law. Such election shall
be approved by the Administrator and otherwise comply with such rules as the Administrator may
adopt to assure compliance with Rule 16b-3, or any successor provision, as then in effect, of the
General Rules and Regulations under the Securities Exchange Act of 1934, if applicable.

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     (f) Nontransferability. No Restricted Stock Award shall be transferable, in whole or
in part, by the Participant, other than by will or by the laws of descent and distribution, prior
to the date the risks of forfeiture described in the Restricted Stock Agreement have lapsed. If
the Participant shall attempt any transfer of any Restricted Stock Award granted under the Plan
prior to such date, such transfer shall be void and the Restricted Stock Award shall terminate.

     (g) Other Provisions. The Restricted Stock Agreement authorized under this Section 11
shall contain such other provisions as the Administrator shall deem advisable.

SECTION 12.

PERFORMANCE AWARDS

     Each Performance Award granted pursuant to this Section 12 shall be evidenced by a written
agreement (the “Performance Award Agreement”). The Performance Award Agreement shall be in such
form as may be approved from time to time by the Administrator and may vary from Participant to
Participant; provided, however, that each Participant and each Performance Award Agreement shall
comply with and be subject to the following terms and conditions:

     (a) Awards. Performance Awards in the form of Performance Units or Performance Shares
may be granted to any Participant in the Plan. Performance Units shall consist of monetary awards
which may be earned or become vested in whole or in part if the Company achieves certain goals
established by the Administrator over a specified Performance Period. Performance Shares shall
consist of shares of Stock or other Awards denominated in shares of Stock that may be earned or
become vested in whole or in part if the Company achieves certain goals established by the
Administrator over a specified Performance Period.

     (b) Performance Goals, Performance Period and Payment. The Performance Award
Agreement shall set forth:

     (i) the number of Performance Units or Performance Shares subject to the Performance
Award, and the dollar value of each Performance Unit;

     (ii) one or more performance goals established by the Administrator based on any one,
or combination of, earnings per share, return on equity, return on assets, total shareholder
return, net operating income, cash flow, increase in revenue, economic value added, increase
in share price or cash flow return on investment, including threshold, target and maximum
levels;

     (iii) the Performance Period over which Performance Units or Performance Shares may be
earned or may become vested;

     (iv) the extent to which partial achievement of the goal(s) may result in a payment or
vesting of the Performance Award, as determined by the Administrator; and

     (v) the date upon which payment of Performance Units will be made or Performance Shares
will be issued, as the case may be, and the extent to which such payment or the receipt of
such Shares may be deferred.

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     (c) Regulatory Compliance. This Section 12 is intended to comply with the
performance-based compensation requirements of Section 162(m) of the Internal Revenue Code and
shall be interpreted in accordance with the rules and regulations thereunder.

     (d) Withholding Taxes. The Company or its Affiliate shall be entitled to withhold and
deduct from future wages of the Participant all legally required amounts necessary to satisfy any
and all withholding and employment-related taxes attributable to the Participant’s Performance
Award. In the event the Participant is required under the Performance Award Agreement to pay the
Company or its Affiliate, or make arrangements satisfactory to the Company or its Affiliate
respecting payment of, such withholding and employment-related taxes, the Administrator may, in its
discretion and pursuant to such rules as it may adopt, permit the Participant to satisfy such
obligations, in whole or in part, by delivering shares of Common Stock. Such shares shall have a
Fair Market Value equal to the minimum required tax withholding, based on the minimum statutory
withholding rates for federal and state tax purposes, including payroll taxes. In no event may the
Participant deliver shares having a Fair Market Value in excess of such statutory minimum required
tax withholding. The Participant’s election to deliver shares of Common Stock for this purpose
shall be made on or before the date that the amount of tax to be withheld is determined under
applicable tax law. Such election shall be approved by the Administrator and otherwise comply with
such rules as the Administrator may adopt to assure compliance with Rule 16b-3, or any successor
provision, as then in effect, of the General Rules and Regulations under the Securities Exchange
Act of 1934, if applicable.

     (e) Nontransferability. No Performance Award shall be transferable, in whole or in
part, by the Participant, other than by will or by the laws of descent and distribution. If the
Participant shall attempt any transfer of any Performance Award granted under the Plan, such
transfer shall be void and the Performance Award shall terminate.

     (f) No Rights as Shareholder. A Participant (or the Participant’s successor or
successors) shall have no rights as a shareholder with respect to any shares covered by a
Performance Award until the date of the issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or
other property), distributions or other rights for which the record date is prior to the date such
stock certificate is actually issued (except as otherwise provided in Section 15 of the Plan).

     (g) Other Provisions. The Performance Award Agreement authorized under this Section
12 shall contain such other provisions as the Administrator shall deem advisable.

SECTION 13.

STOCK APPRECIATION RIGHTS

     Each Stock Appreciation Right granted pursuant to this Section 13 shall be evidenced by a
written agreement (the “Stock Appreciation Agreement”). The Stock Appreciation Agreement shall be
in such form as may be approved from time to time by the Administrator and may vary from
Participant to Participant; provided, however, that each Participant and each Stock Appreciation
Agreement shall comply with and be subject to the following terms and conditions:

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     (a) Awards. A Stock Appreciation Right shall entitle the Participant to receive, upon
exercise, cash, shares of Stock, or any combination thereof, having a value equal to the excess of
(i) the Fair Market Value of a specified number of shares of Stock on the date of such exercise,
over (ii) a specified exercise price. Unless otherwise determined by the Administrator, the
specified exercise price shall not be less than 100% of the Fair Market Value of such shares of
Stock on the date of grant of the Stock Appreciation Right. A Stock Appreciation Right may be
granted independent of or in tandem with a previously or contemporaneously granted Option.

     (b) Term and Exercisability. The term during which any Stock Appreciation Right
granted under the Plan may be exercised shall be established in each case by the Administrator.
The Stock Appreciation Agreement shall state when the Stock Appreciation Right becomes exercisable
and shall also state the maximum term during which such Stock Appreciation Right may be exercised.
In the event a Stock Appreciation Right is exercisable immediately, the manner of exercise of such
Stock Appreciation Right in the event it is not exercised in full immediately shall be specified in
the Stock Appreciation Agreement. The Administrator may accelerate the exercisability of any
Stock Appreciation Right granted hereunder which is not immediately exercisable as of the date of
grant. If a Stock Appreciation Right is granted in tandem with an Option, Stock Appreciation
Agreement shall set forth the extent to which the exercise of all or a portion of the Stock
Appreciation Right shall cancel a corresponding portion of the Option, and the extent to which the
exercise of all or a portion of the Option shall cancel a corresponding portion of the Stock
Appreciation Right.

     (c) Withholding Taxes. The Company or its Affiliate shall be entitled to withhold and
deduct from future wages of the Participant all legally required amounts necessary to satisfy any
and all withholding and employment-related taxes attributable to the Participant’s Stock
Appreciation Right. In the event the Participant is required under the Stock Appreciation Right to
pay the Company or its Affiliate, or make arrangements satisfactory to the Company or its Affiliate
respecting payment of, such withholding and employment-related taxes, the Administrator may, in its
discretion and pursuant to such rules as it may adopt, permit the Participant to satisfy such
obligations, in whole or in part, by delivering shares of Common Stock. Such shares shall have a
Fair Market Value equal to the minimum required tax withholding, based on the minimum statutory
withholding rates for federal and state tax purposes, including payroll taxes. In no event may the
Participant deliver shares having a Fair Market Value in excess of such statutory minimum required
tax withholding. The Participant’s election to deliver shares of Common Stock for this purpose
shall be made on or before the date that the amount of tax to be withheld is determined under
applicable tax law. Such election shall be approved by the Administrator and otherwise comply with
such rules as the Administrator may adopt to assure compliance with Rule 16b-3, or any successor
provision, as then in effect, of the General Rules and Regulations under the Securities Exchange
Act of 1934, if applicable.

     (d) Nontransferability. No Stock Appreciation Right shall be transferable, in whole
or in part, by the Participant, other than by will or by the laws of descent and distribution. If
the Participant shall attempt any transfer of any Stock Appreciation Right granted under the Plan,
such transfer shall be void and the Stock Appreciation Right shall terminate.

     (e) No Rights as Shareholder. A Participant (or the Participant’s successor or
successors) shall have no rights as a shareholder with respect to any shares covered by a Stock
Appreciation Right until the date of the issuance of a stock certificate evidencing such shares.
No

12

 

adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or
other property), distributions or other rights for which the record date is prior to the date such
stock certificate is actually issued (except as otherwise provided in Section 15 of the Plan).

     (f) Other Provisions. The Stock Appreciation Agreement authorized under this Section
13 shall contain such other provisions as the Administrator shall deem advisable, including but not
limited to any restrictions on the exercise of the Stock Appreciation Right which may be necessary
to comply with Rule 16b-3 of the Securities Exchange Act of 1934, as amended.

SECTION 14.

AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS

     (a) Upon Joining Board. Each Non-Employee Director of the Company whose initial
election or appointment to the Board of Directors occurs on or after the date this Plan is approved
by the Company’s shareholders shall, as of the date of such election, automatically be granted an
option to purchase 5,500 shares of Common Stock at an option price per share equal to 100% of the
Fair Market Value of the Common Stock on such date. Options granted pursuant to this subsection
(a) shall be immediately exercisable upon grant.

     (b) Upon Re-election to Board. Each Non-Employee Director who, on and after the date
this Plan is approved by the Company’s shareholders, is re-elected as a director of the Company or
whose term of office continues after a meeting of shareholders at which directors are elected
shall, as of the date of such re-election or shareholder meeting, automatically be granted an
option to purchase 5,500 shares of the Common Stock at an option price per share equal to 100% of
the Fair Market Value of the Common Stock on the date of such re-election or shareholder meeting.
Options granted pursuant to this subsection (b) shall be immediately exercisable in full.

     (c) General. No director shall receive more than one option to purchase shares
pursuant to this Section 14 in any one fiscal year. All options granted pursuant to this Section
14 shall be designated as nonqualified options and shall be subject to the same terms and
provisions as are then in effect with respect to granting of nonqualified options to officers and
employees of the Company, except that the option shall expire ten (10) years after the date of
grant; provided, however, that in the event of the death of the optionee, the option shall expire
on the earlier of (i) six (6) months after the date of death and (ii) ten (10) years after the date
of grant.

SECTION 15.

RECAPITALIZATION, SALE, MERGER, EXCHANGE

OR LIQUIDATION

     In the event of an increase or decrease in the number of shares of Common Stock resulting from
a subdivision or consolidation of shares, stock dividend, or stock split, the Board may, in its
sole discretion, adjust the number of shares of Stock reserved under Section 6 hereof, the number
of shares of Stock underlying the automatic option grants in Section 14 hereof, the number of
shares of Stock covered by each Award, and, if applicable, the price per share thereof to reflect
such change.

13

 

Additional shares which may be credited pursuant to such adjustment shall be subject to the same
restrictions as are applicable to the shares with respect to which the adjustment relates.

     Unless otherwise provided in the agreement with respect to an Award, in the event of an
acquisition of the Company through the sale of substantially all of the Company’s assets and the
consequent discontinuance of its business or through a merger, consolidation, exchange,
reorganization, reclassification, extraordinary dividend, divestiture or liquidation of the Company
(collectively referred to as a “transaction”), the Board may provide for one or more of the
following:

     (a) the equitable acceleration of the exercisability of any outstanding Options or Stock
Appreciation Rights, the vesting and payment of any Performance Awards, or the lapsing of the risks
of forfeiture on any Restricted Stock Awards;

     (b) the complete termination of this Plan, the cancellation of outstanding Options or Stock
Appreciation Rights not exercised prior to a date specified by the Board (which date shall give
Participants a reasonable period of time in which to exercise such Award prior to the effectiveness
of such transaction), the cancellation of any Performance Award and the cancellation of any
Restricted Stock Awards for which the risks of forfeiture have not lapsed;

     (c) that Participants holding outstanding Options and Stock Appreciation Rights shall receive,
with respect to each share of Stock subject to such Awards, as of the effective date of any such
transaction, cash in an amount equal to the excess of the Fair Market Value of such Stock on the
date immediately preceding the effective date of such transaction over the price per share of such
Options or Stock Appreciation Rights; provided that the Board may, in lieu of such cash payment,
distribute to such Participants shares of Common Stock of the Company or shares of stock of any
corporation succeeding the Company by reason of such transaction, such shares having a value equal
to the cash payment herein;

     (d) that Participants holding outstanding Restricted Stock Awards and Performance Share Awards
shall receive, with respect to each share of Stock subject to such Awards, as of the effective date
of any such transaction, cash in an amount equal to the Fair Market Value of such Stock on the date
immediately preceding the effective date of such transaction; provided that the Board may, in lieu
of such cash payment, distribute to such Participants shares of Common Stock of the Company or
shares of stock of any corporation succeeding the Company by reason of such transaction, such
shares having a value equal to the cash payment herein;

     (e) the continuance of the Plan with respect to the exercise of Options or Stock Appreciation
Rights which were outstanding as of the date of adoption by the Board of such plan for such
transaction and provide to Participants holding such Options and Stock Appreciation Rights the
right to exercise their respective Options or Stock Appreciation Rights as to an equivalent number
of shares of stock of the corporation succeeding the Company by reason of such transaction; and

     (f) the continuance of the Plan with respect to Restricted Stock Awards for which the risks of
forfeiture have not lapsed as of the date of adoption by the Board of such plan for such
transaction and provide to Participants holding such Awards the right to receive an equivalent
number of shares of stock of the corporation succeeding the Company by reason of such transaction.

14

 

     The Board may restrict the rights of or the applicability of this Section 15 to the extent
necessary to comply with Section 16(b) of the Securities Exchange Act of 1934, the Internal Revenue
Code or any other applicable law or regulation. The grant of an Award pursuant to the Plan shall
not limit in any way the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge, exchange or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets.

SECTION 16.

INVESTMENT PURPOSE

     No shares of Stock shall be issued pursuant to the Plan unless and until there has been
compliance, in the opinion of Company’s counsel, with all applicable legal requirements, including
without limitation, those relating to securities laws and stock exchange listing requirements. As
a condition to the issuance of Stock to Participant, the Administrator may require Participant to
(a) represent that the shares of Stock are being acquired for investment and not resale and to make
such other representations as the Administrator shall deem necessary or appropriate to qualify the
issuance of the shares as exempt from the Securities Act of 1933 and any other applicable
securities laws, and (b) represent that Participant shall not dispose of the shares of Stock in
violation of the Securities Act of 1933 or any other applicable securities laws.

     As a further condition to the issuance of Stock to Participant, Participant agrees to the
following:

     (a) In the event the Company advises Participant that it plans an underwritten public offering
of its Common Stock in compliance with the Securities Act of 1933, as amended, and the
underwriter(s) seek to impose restrictions under which certain shareholders may not sell or
contract to sell or grant any option to buy or otherwise dispose of part or all of their rights to
the Common Stock underlying Awards, Participant will not, for a period not to exceed 180 days from
the prospectus, sell or contract to sell or grant an option to buy or otherwise dispose of any
Award granted to Participant pursuant to the Plan or any of the underlying shares of Common Stock
without the prior written consent of the underwriter(s) or its representative(s).

     (b) In the event the Company makes any public offering of its securities and determines in its
sole discretion that it is necessary to reduce the number of issued but unexercised Options or
Stock Appreciation Rights so as to comply with any state’s securities or Blue Sky law limitations
with respect thereto, the Board shall have the right (i) to accelerate the exercisability of any
Award and the date on which such Award must be exercised, provided that the Company gives
Participant prior written notice of such acceleration, and (ii) to cancel any Awards or portions
thereof which Participant does not exercise prior to or contemporaneously with such public
offering.

     (c) In the event of a transaction (as defined in Section 15 of the Plan), Participant will
comply with Rule 145 of the Securities Act of 1933 and any other restrictions imposed under other
applicable legal or accounting principles if Participant is an “affiliate” (as defined in such
applicable legal and accounting principles) at the time of the transaction, and Participant will
execute any documents necessary to ensure compliance with such rules.

15

 

     The Company reserves the right to place a legend on any stock certificate issued upon the
exercise of an Award pursuant to the Plan to assure compliance with this Section 15.

SECTION 17.

AMENDMENT OF THE PLAN

     The Board may from time to time, insofar as permitted by law, suspend or discontinue the Plan
or revise or amend it in any respect; provided, however, that no such revision or amendment, except
as is authorized in Section 15, shall impair the terms and conditions of any Award which is
outstanding on the date of such revision or amendment to the material detriment of the Participant
without the consent of the Participant. Notwithstanding the foregoing, no such revision or
amendment shall (i) materially increase the number of shares subject to the Plan except as provided
in Section 15 hereof, (ii) change the designation of the class of employees eligible to receive
Awards, (iii) decrease the price at which Options may be granted, or (iv) materially increase the
benefits accruing to Participants under the Plan without the approval of the shareholders of the
Company if such approval is required for compliance with the requirements of any applicable law or
regulation. Furthermore, the Plan may not, without the approval of the shareholders, be amended in
any manner that will cause incentive stock options to fail to meet the requirements of Section 422
of the Internal Revenue Code.

SECTION 18.

NO OBLIGATION TO EXERCISE OPTION

     The granting of an Option or Stock Appreciation Right shall impose no obligation upon the
Participant to exercise such Option or Stock Appreciation Right. Further, the granting of any
Award hereunder shall not impose upon the Company or any Affiliate any obligation to retain the
Participant in its employ for any period.

16exv10w2

 

EXHIBIT 10.2

INCENTIVE STOCK OPTION AGREEMENT

WINLAND ELECTRONICS, INC.

2005 EQUITY INCENTIVE PLAN

     THIS AGREEMENT, made effective as of this                      day of                                         , 20                    , by and between
Winland Electronics, Inc., a Minnesota corporation (the “Company”), and                                                             
(“Participant”).

W I T N E S S E T H:

     WHEREAS, Participant on the date hereof is a key employee or officer of the Company or one of
its Subsidiaries; and

     WHEREAS, the Company wishes to grant an incentive stock option to Participant to purchase
shares of the Company’s Common Stock pursuant to the Company’s 2005 Equity Incentive Plan (the
“Plan”); and

     WHEREAS, the Administrator of the Plan has authorized the grant of an incentive stock option
to Participant and has determined that, as of the effective date of this Agreement, the fair market
value of the Company’s Common Stock is $                     per share;

     NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained,
the parties hereto agree as follows:

     1. Grant of Option. The Company hereby grants to Participant on the date set forth
above (the “Date of Grant”) the right and option (the “Option”) to purchase all or any portion of
an aggregate of                                                              (                    ) shares of Common Stock at a per share price of
$                     on the terms and conditions set forth herein and subject to adjustment pursuant
to Section 15 of the Plan. This Option is intended to be an incentive stock option within the
meaning of Section 422, or any successor provision, of the Internal Revenue Code of 1986, as
amended (the “Code”), and the regulations thereunder, to the extent permitted under Code Section
422(d).

     2. Duration and Exercisability.

          a. General. The term during which this Option may be exercised shall terminate on
                                        ,                     , except as otherwise provided in Paragraphs
2(b) through 2(d) below. This Option shall become exercisable according to the following schedule:

	 	 	 
	Vesting Date

	 	Number of Shares

 

 

Once the Option becomes exercisable to the extent of one hundred percent (100%) of the aggregate
number of shares specified in Paragraph 1, Participant may continue to exercise this Option under
the terms and conditions of this Agreement until the termination of the Option as provided herein.
If Participant does not purchase upon an exercise of this Option the full number of shares which
Participant is then entitled to purchase, Participant may purchase upon any subsequent exercise
prior to this Option’s termination such previously unpurchased shares in addition to those
Participant is otherwise entitled to purchase.

          b. Termination of Employment (other than Disability or Death). If Participant’s
employment with the Company or any Subsidiary is terminated for any reason other than disability or
death, this Option shall completely terminate on the earlier of (i) the close of business on the
three-month anniversary date of such termination of employment, and (ii) the expiration date of
this Option stated in Paragraph 2(a) above. In such period following the termination of
Participant’s employment, this Option shall be exercisable only to the extent the Option was
exercisable on the vesting date immediately preceding such termination of employment, but had not
previously been exercised. To the extent this Option was not exercisable upon such termination of
employment, or if Participant does not exercise the Option within the time specified in this
Paragraph 2(b), all rights of Participant under this Option shall be forfeited.

          c. Disability. If Participant’s employment terminates because of disability (as
defined in Code Section 22(e), or any successor provision), this Option shall terminate on the
earlier of (i) the close of business on the twelve-month anniversary date of such termination of
employment, and (ii) the expiration date of this Option stated in Paragraph 2(a) above. In such
period following the termination of Participant’s employment, this Option shall be exercisable only
to the extent the Option was exercisable on the vesting date immediately preceding such termination
of employment, but had not previously been exercised. To the extent this Option was not
exercisable upon such termination of employment, or if Participant does not exercise the Option
within the time specified in this Paragraph 2(c), all rights of Participant under this Option shall
be forfeited.

          d. Death. In the event of Participant’s death, this Option shall terminate on the
earlier of (i) the close of business on the twelve-month anniversary date of the date of
Participant’s death, and (ii) the expiration date of this Option stated in Paragraph 2(a) above.
In such period following Participant’s death, this Option shall be exercisable by the person or
persons to whom Participant’s rights under this Option shall have passed by Participant’s will or
by the laws of descent and distribution only to the extent the Option was exercisable on the
vesting date immediately preceding the date of Participant’s death, but had not previously been
exercised. To the extent this Option was not exercisable upon the date of Participant’s death, or
if such person or persons do not exercise this Option within the time specified in this Paragraph
2(d), all rights under this Option shall be forfeited.

     3. Manner of Exercise.

          a. General. The Option may be exercised only by Participant (or other proper party in
the event of death or incapacity), subject to the conditions of the Plan and subject to such

 - 2 -

 

other administrative rules as the Administrator may deem advisable, by delivering within the Option
Period written notice of exercise to the Company at its principal office. The notice shall state
the number of shares as to which the Option is being exercised and shall be accompanied by payment
in full of the Option price for all shares designated in the notice. The exercise of the Option
shall be deemed effective upon receipt of such notice by the Company and upon payment that complies
with the terms of the Plan and this Agreement. The Option may be exercised with respect to any
number or all of the shares as to which it can then be exercised and, if partially exercised, may
be so exercised as to the unexercised shares any number of times during the Option period as
provided herein.

          b. Form of Payment. Payment of the option price by Participant shall be in the form
of cash, personal check, certified check or, if not prohibited by the
Administrator, previously acquired shares of Common Stock of the
Company, or any combination thereof. Any stock so tendered as part of such payment shall be valued
at its Fair Market Value as provided in the Plan. For purposes of this Agreement, “previously
acquired shares of Common Stock” shall include shares of Common Stock that are already owned by
Participant at the time of exercise.

          c. Stock Transfer Records. As soon as practicable after the effective exercise of all
or any part of the Option, Participant shall be recorded on the stock transfer books of the Company
as the owner of the shares purchased, and the Company shall deliver to Participant one or more duly
issued stock certificates evidencing such ownership. All requisite original issue or transfer
documentary stamp taxes shall be paid by the Company.

     4. Miscellaneous.

          a. Employment; Rights as Shareholder. This Agreement shall not confer on Participant
any right with respect to continuance of employment by the Company or any of its Subsidiaries, nor
will it interfere in any way with the right of the Company to terminate such employment.
Participant shall have no rights as a shareholder with respect to shares subject to this Option
until such shares have been issued to Participant upon exercise of this Option. No adjustment
shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other
property), distributions or other rights for which the record date is prior to the date such shares
are issued, except as provided in Section 15 of the Plan.

          b. Securities Law Compliance. The exercise of all or any parts of this Option shall
only be effective at such time as counsel to the Company shall have determined that the issuance
and delivery of Common Stock pursuant to such exercise will not violate any state or federal
securities or other laws. Participant may be required by the Company, as a condition of the
effectiveness of any exercise of this Option, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held, until such time that such Common Stock is
registered and freely tradable under applicable state and federal securities laws, for
Participant’s own account without a view to any further distribution thereof, that the certificates
for such shares shall bear an appropriate legend to that effect and that such shares will be not
transferred or disposed of except in compliance with applicable state and federal securities laws.

          c. Mergers, Recapitalizations, Stock Splits, Etc. Pursuant and subject to Section 15
of the Plan, certain changes in the number or character of the Common Stock of the Company (through
sale, merger, consolidation, exchange, reorganization, divestiture (including a

 - 3 -

 

spin-off), liquidation, recapitalization, stock split, stock dividend or otherwise) shall result in
an adjustment, reduction or enlargement, as appropriate, in Participant’s rights with respect to
any unexercised portion of the Option (i.e., Participant shall have such “anti-dilution”
rights under the Option with respect to such events, but shall not have “preemptive” rights).

          d. Shares Reserved. The Company shall at all times during the option period reserve
and keep available such number of shares as will be sufficient to satisfy the requirements of this
Agreement.

          e. Withholding Taxes on Disqualifying Disposition. In the event of a disqualifying
disposition of the shares acquired through the exercise of this Option, Participant hereby agrees
to inform the Company of such disposition. Upon notice of a disqualifying disposition, the Company
may take such action as it deems appropriate to insure that, if necessary to comply with all
applicable federal or state income tax laws or regulations, all applicable federal and state
payroll, income or other taxes are withheld from any amounts payable by the Company to Participant.
If the Company is unable to withhold such federal and state taxes, for whatever reason,
Participant hereby agrees to pay to the Company an amount equal to the amount the Company would
otherwise be required to withhold under federal or state law. Participant may, subject to the
approval and discretion of the Administrator or such administrative rules it may deem advisable,
elect to have all or a portion of such tax withholding obligations satisfied by delivering shares
of the Company’s Common Stock having a fair market value equal to such obligations. Such election
shall be approved by the Administrator and otherwise comply with such rules as the Administrator
may adopt to assure compliance with Rule 16b-3, or any successor provision, as then in effect, of
the General Rules and Regulations under the Securities Exchange Act of 1934, if applicable.

          f. Nontransferability. During the lifetime of Participant, the accrued Option shall
be exercisable only by Participant or by the Participant’s guardian or other legal representative,
and shall not be assignable or transferable by Participant, in whole or in part, other than by will
or by the laws of descent and distribution.

          g. 2005 Equity Incentive Plan. The Option evidenced by this Agreement is granted
pursuant to the Plan, a copy of which Plan has been made available to Participant and is hereby
incorporated into this Agreement. This Agreement is subject to and in all respects limited and
conditioned as provided in the Plan. All defined terms of the Plan shall have the same meaning
when used in this Agreement. The Plan governs this Option and, in the event of any questions as
to the construction of this Agreement or in the event of a conflict between the Plan and this
Agreement, the Plan shall govern, except as the Plan otherwise provides.

          h. Lockup Period Limitation. Participant agrees that in the event the Company advises
Participant that it plans an underwritten public offering of its Common Stock in compliance with
the Securities Act of 1933, as amended, and that the underwriter(s) seeks to impose restrictions
under which certain shareholders may not sell or contract to sell or grant any option to buy or
otherwise dispose of part or all of their stock purchase rights of the underlying Common Stock,
Participant hereby agrees that for a period not to exceed 180 days from the prospectus, Participant
will not sell or contract to sell or grant an option to buy or otherwise dispose of this option or
any of the underlying shares of Common Stock without the prior written consent of the
underwriter(s) or its representative(s).

 - 4 -

 

          i. Blue Sky Limitation. Notwithstanding anything in this Agreement to the contrary,
in the event the Company makes any public offering of its securities and determines in its sole
discretion that it is necessary to reduce the number of issued but unexercised stock purchase
rights so as to comply with any state securities or Blue Sky law limitations with respect thereto,
the Board of Directors of the Company shall have the right (i) to accelerate the exercisability of
this Option and the date on which this Option must be exercised, provided that the Company gives
Participant 15 days’ prior written notice of such acceleration, and (ii) to cancel any portion of
this Option or any other option granted to Participant pursuant to the Plan which is not exercised
prior to or contemporaneously with such public offering. Notice shall be deemed given when
delivered personally or when deposited in the United States mail, first class postage prepaid and
addressed to Participant at the address of Participant on file with the Company.

          j. Stock Legend. The Administrator may require that the certificates for any shares
of Common Stock purchased by Participant (or, in the case of death, Participant’s successors) shall
bear an appropriate legend to reflect the restrictions of Paragraphs 4(b), 4(h) and 4(i) of this
Agreement.

          k. Scope of Agreement. This Agreement shall bind and inure to the benefit of the
Company and its successors and assigns and Participant and any successor or successors of
Participant permitted by Paragraph 2 or Paragraph 4(f) above.

          l. Arbitration. Any dispute arising out of or relating to this Agreement or the
alleged breach of it, or the making of this Agreement, including claims of fraud in the inducement,
shall be discussed between the disputing parties in a good faith effort to arrive at a mutual
settlement of any such controversy. If, notwithstanding, such dispute cannot be resolved, such
dispute shall be settled by binding arbitration. Judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall be a
retired state or federal judge or an attorney who has practiced securities or business litigation
for at least 10 years. If the parties cannot agree on an arbitrator within 20 days, any party may
request that the chief judge of the District Court for Hennepin County, Minnesota, select an
arbitrator. Arbitration will be conducted pursuant to the provisions of this Agreement, and the
commercial arbitration rules of the American Arbitration Association, unless such rules are
inconsistent with the provisions of this Agreement. Limited civil discovery shall be permitted for
the production of documents and taking of depositions. Unresolved discovery disputes may be
brought to the attention of the arbitrator who may dispose of such dispute. The arbitrator shall
have the authority to award any remedy or relief that a court of this state could order or grant;
provided, however, that punitive or exemplary damages shall not be awarded. The arbitrator may
award to the prevailing party, if any, as determined by the arbitrator, all of its costs and fees,
including the arbitrator’s fees, administrative fees, travel expenses, out-of-pocket expenses and
reasonable attorneys’ fees. Unless otherwise agreed by the parties, the place of any arbitration
proceedings shall be Hennepin County, Minnesota.

 - 5 -

 

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day
and year first above written.

	 	 	 	 	 	 	 
	 	 	WINLAND ELECTRONICS, NC.
	 
	 	 	 	 	 	 
	

	 	By:	 	 	 	 
	 	 	 	 	 
	

	 	 	 	Its:	 	 
	

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	

	 	 	 	 	 	COMPANY
	 
	 	 	 	 	 	 
	 	 	 
	 
	 	 	 	 	 	 
	

	 	 	 	 	 	PARTICIPANT

 - 6 -

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