##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-QSB
 QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)  OF  THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarter Ended September 30, 2005
    
    Commission File Number: 0-15637
 WINLAND ELECTRONICS, INC.
  Minnesota
    
    
    
    41-0992135(state or other jurisdiction of
    
    
    
    (I.R.S. Employerincorporation or organization)
    
    
    
    Identification Number)
 1950 Excel Drive, Mankato, Minnesota 56001
 (507) 625-7231
 
  þ o
  o þ
  o þ




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TABLE OF CONTENTS  PART I-FINANCIAL INFORMATIONITEM 1: FINANCIAL STATEMENTSITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONITEM 3. CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 6. EXHIBITSSIGNATURESEXHIBIT INDEX TO FORM 10-QSBCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906    Table of Contents  
 PART I-FINANCIAL INFORMATION
 
 ITEM 1: FINANCIAL STATEMENTS
 WINLAND ELECTRONICS, INC.  BALANCE SHEETS
 September 30
    
    
    December 31,2005
    
    
    2004(UNAUDITED)ASSETSCurrent AssetsCash
    

    
    
    
    

    $
    1,016,058
    
    
    
    
    

    
    $
    457,576Accounts receivable, net
    

    
    
    
    


    
    3,541,692
    
    
    
    
    

    
    
    2,774,373Income tax receivable
    

    
    
    
    


    
    
    
    
    
    
    

    
    
    30,293InventoriesRaw materials
    

    
    3,430,524
    
    


    
    
    
    
    
    1,697,483Work in process
    

    
    205,520
    
    

    
    
    
    
    
    257,050Finished goods
    

    
    1,496,575
    
    

    
    
    
    
    
    1,573,614Allowance for obsolete inventory
    

    
    (154,800
    )
    

    
    
    
    
    
    (150,000
    )Total inventories
    

    
    
    
    

    
    4,977,819
    
    
    
    
    

    
    
    3,378,147Prepaid expenses
    

    
    
    
    

    
    505,132
    
    
    
    
    

    
    
    285,337Deferred taxes
    

    
    
    
    

    
    197,700
    
    
    
    
    

    
    
    197,700Total current assets
    

    
    
    
    


    
    10,238,401
    
    
    
    
    

    
    
    7,123,426Other Assets

    
    
    
    

    
    
    1,434
    
    
    
    
    

    
    
    85Property and Equipment, at cost:Land and land improvements
    

    
    272,901
    
    

    
    
    
    
    
    272,901Building
    

    
    3,040,435
    
    

    
    
    
    
    
    3,002,880Machinery and equipment
    

    
    4,849,575
    
    

    
    
    
    
    
    4,675,060Data processing equipment
    

    
    1,162,177
    
    

    
    
    
    
    
    1,372,474Office furniture and equipment
    

    
    407,309
    
    

    
    
    
    
    
    366,915Total property and equipment
    

    
    
    
    

    
    9,732,397
    
    
    
    
    

    
    
    9,690,230Less accumulated depreciation
    

    
    
    
    

    
    (5,482,373
    )
    
    
    
    

    
    
    (5,447,274
    )Net property and equipment
    

    
    
    
    

    
    4,250,024
    
    
    
    
    

    
    
    4,242,956Total assets
    

    
    
    
    

    $
    14,489,859
    
    
    
    
    

    

    $
    11,366,467
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WINLAND ELECTRONICS, INC.  BALANCE SHEETS
 September 30
    
    
    December 31,2005
    
    
    2004(UNAUDITED)LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesRevolving credit agreement
    
    $
    
    
    
    $
    270,000Current maturities of long-term debt
    
    
    542,168
    
    
    
    396,017Accounts payable
    
    
    2,536,314
    
    
    
    960,423Accrued expenses:Compensation
    
    
    909,246
    
    
    
    618,411Other
    
    
    133,784
    
    
    
    261,173Total current liabilities
    
    
    4,121,512
    
    
    
    2,506,024Long Term LiabilitiesLong-term debt, less current maturities
    
    
    1,554,611
    
    
    
    1,579,610Deferred taxes
    
    
    263,800
    
    
    
    263,800Deferred revenue
    
    
    156,573
    
    
    
    162,678Total long-term liabilities
    
    
    1,974,984
    
    
    
    2,006,088Total liabilities
    
    
    6,096,496
    
    
    
    4,512,112Stockholders EquityCommon stock
    
    
    35,166
    
    
    
    34,239Additional paid-in capital
    
    
    4,149,321
    
    
    
    3,989,425Retained earnings
    
    
    4,208,876
    
    
    
    2,830,691Total stockholders equity
    
    
    8,393,363
    
    
    
    6,854,355Total liabilities and stockholders equity
    
    $
    14,489,859
    
    
    $
    11,366,467
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WINLAND ELECTRONICS, INC.
STATEMENTS OF INCOME
For the Three Months and Nine Months Ended September 30, 2005 and 2004
(UNAUDITED)
 Three Months Ended
    
    
    Nine Months Ended2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    $
    7,399,885
    
    
    $
    6,613,692
    
    
    $
    21,542,640
    
    
    $
    17,625,148Cost of sales
    
    
    5,700,612
    
    
    
    5,079,296
    
    
    
    16,265,235
    
    
    
    13,689,375Gross profit
    
    
    1,699,273
    
    
    
    1,534,396
    
    
    
    5,277,405
    
    
    
    3,935,773Operating expenses:General and administrative
    
    
    432,673
    
    
    
    397,607
    
    
    
    1,390,657
    
    
    
    1,223,025Sales and marketing
    
    
    321,205
    
    
    
    315,789
    
    
    
    997,904
    
    
    
    946,287Research and development
    
    
    211,994
    
    
    
    151,753
    
    
    
    611,062
    
    
    
    567,486965,872
    
    
    
    865,149
    
    
    
    2,999,623
    
    
    
    2,736,798Operating income
    
    
    733,401
    
    
    
    669,247
    
    
    
    2,277,782
    
    
    
    1,198,975Other income (expenses):Interest expense
    
    
    (32,564
    )
    
    
    (46,413
    )
    
    
    (92,537
    )
    
    
    (110,595
    )Other, net
    
    
    15,195
    
    
    
    (4,880
    )
    
    
    74,040
    
    
    
    16,964(17,369
    )
    
    
    (51,293
    )
    
    
    (18,497
    )
    
    
    (93,631
    )Income before
income taxes
    
    
    716,032
    
    
    
    617,954
    
    
    
    2,259,285
    
    
    
    1,105,344Income tax expense
    
    
    (279,200
    )
    
    
    (241,000
    )
    
    
    (881,100
    )
    
    
    (431,000
    )Net income
    
    $
    436,832
    
    
    $
    376,954
    
    
    $
    1,378,185
    
    
    $
    674,344Earnings per common share data:Basic
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.39
    
    
    $
    0.20Diluted
    
    
    0.12
    
    
    
    0.11
    
    
    
    0.38
    
    
    
    0.19Weighted-average number of common shares outstanding:Basic
    
    
    3,519,476
    
    
    
    3,366,542
    
    
    
    3,493,663
    
    
    
    3,360,980Diluted
    
    
    3,690,430
    
    
    
    3,485,670
    
    
    
    3,649,174
    
    
    
    3,535,633
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WINLAND ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2005 and 2004
(UNAUDITED)
 2005
    
    
    2004Cash Flows From Operating ActivitiesNet income
    
    $
    1,378,185
    
    
    $
    674,344Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    419,529
    
    
    
    487,464Loss on disposal of equipment
    
    
    1,202
    
    
    
    3,196Investor relations expense, warrants issued
    
    
    27,957
    
    
    
    16,193Deferred taxes
    
    
    
    
    
    
    (14,000
    )Changes in assets and liabilities:Accounts receivable
    
    
    (767,319
    )
    
    
    (951,414
    )Income tax receivable
    
    
    30,293
    
    
    
    122,749Inventories
    
    
    (1,599,671
    )
    
    
    (1,621,750
    )Prepaid expenses
    
    
    (210,275
    )
    
    
    (104,518
    )Accounts payable
    
    
    1,575,891
    
    
    
    (268,980
    )Accrued expenses, including deferred
revenue and income taxes payable
    
    
    157,340
    
    
    
    123,903Net cash provided by (used in) operating activities
    
    
    1,013,132
    
    
    
    (1,532,813
    )Cash Flows From Investing ActivitiesPurchases of property and equipment
    
    
    (429,148
    )
    
    
    (1,268,523
    )Proceeds from the sale of equipment
    
    
    
    
    
    
    18,500Net cash used in investing activities
    
    
    (429,148
    )
    
    
    (1,250,023
    )Cash flows From Financing ActivitiesNet borrowings (payments) on revolving line of credit
    
    
    (270,000
    )
    
    
    1,379,000Proceeds from note payable to bank
    
    
    500,000
    
    
    
    2,000,000Payments on long-term borrowings, including capital
lease obligations
    
    
    (378,848
    )
    
    
    (1,514,451
    )Proceeds from issuance of common stock
    
    
    123,346
    
    
    
    31,345Net cash used in (provided by) financing activities
    
    
    (25,502
    )
    
    
    1,895,894Net increase (decrease) in cash
    
    
    558,482
    
    
    
    (886,942
    )CashBeginning
    
    
    457,576
    
    
    
    1,412,058End
    
    $
    1,016,058
    
    
    $
    525,116Supplemental Disclosures of Cash Flow InformationCash payments for:Interest
    
    $
    84,104
    
    
    $
    110,480Income taxes
    
    
    857,425
    
    
    
    169,314Supplemental Schedule of Noncash Financing ActivitiesWarrants Issued in Connection with Investors Relations
Services to be Provided
    
    $
    37,477
    
    
    $
    
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WINLAND ELECTRONICS, INC.
NOTES TO THE INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
 Note 1. Basis of Presentation
    Reclassifications:
 Note 2. Earnings Per Common Share
  Note 3. Financing Arrangement
  6




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Note 4. Major Customers and Enterprisewide Disclosures
 Major Customers:
 Enterprisewide Disclosures:
 Three Months Ended
    
    
    Three Months EndedSeptember 30, 2005
    
    
    September 30, 2004Proprietary microprocessors and mechanically
controlled sensors and alarms
    
    $
    714,801
    
    
    $
    913,653Electronic controls and assemblies for
OEM customers
    
    
    6,611,794
    
    
    
    5,626,961Engineering Design Services
    
    
    58,041
    
    
    
    51,616Freight Out
    
    
    15,250
    
    
    
    21,462$
    7,399,885
    
    
    $
    6,613,692
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2004Proprietary microprocessors and mechanically
controlled sensors and alarms
    
    $
    2,157,576
    
    
    $
    2,142,791Electronic controls and assemblies for
OEM customers
    
    
    19,077,407
    
    
    
    15,305,173Engineering Design Services
    
    
    260,253
    
    
    
    106,951Freight Out
    
    
    47,404
    
    
    
    70,232$
    21,542,640
    
    
    $
    17,625,148
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Note 5. Warrants and Stock-Based Compensation Plans
 Warrants:
   Stock-Based Compensation Plans:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Net Income:As reported
    
    $
    436,832
    
    
    $
    376,954
    
    
    $
    1,378,185
    
    
    $
    674,344Deduct total stock-based employee compensation
expense determined under the fair value-based
method for all awards net of related tax effects
    
    
    (12,762
    )
    
    
    (13,715
    )
    
    
    (65,283
    )
    
    
    (50,675
    )Pro forma
    
    $
    424,070
    
    
    $
    363,239
    
    
    $
    1,312,902
    
    
    $
    623,669Basic Earnings per shareAs reported
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.39
    
    
    $
    0.20Pro forma
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.38
    
    
    $
    0.19Diluted Earnings per per shareAs reported
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.38
    
    
    $
    0.19Pro forma
    
    $
    0.11
    
    
    $
    0.10
    
    
    $
    0.36
    
    
    $
    0.18
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Note 6. New Accounting Standards
    Accounting Changes and Error Corrections Accounting Changes Reporting
Accounting Changes in Interim Financial Statements
 9




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ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Overview
 Executive Summary   .
  RESULTS OF OPERATIONS
Three and nine months ended September 30, 2005 vs.
Three and nine months ended September 30, 2004
 Net Sales
  10




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Cost of Sales
  Gross Profits
 Operating Expenses
 11




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Interest Expense
 Net Income
 12




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LIQUIDITY AND CAPITAL RESOURCES
       Contractual Cash Obligations at 9/30/05
 Monthly
    
    
    Buy OutPmt
    
    
    Amount
    
    
    Last Pmt
    
    
    2,005
    
    
    2,006
    
    
    2,007
    
    
    2,008
    
    
    2009+
    
    
    TotalBuilding Mortgage
    
    
    11,373.34
    
    
    
    4,439.47
    
    
    
    10/01/14
    
    
    
    22,747
    
    
    
    136,480
    
    
    
    136,480
    
    
    
    136,480
    
    
    
    788,578
    
    
    
    1,220,765Equipment Capital Lease
    
    
    7,783.21
    
    
    
    7,783.21
    
    
    
    11/30/06
    
    
    
    23,350
    
    
    
    85,615
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,965Equipment Capital Lease
    
    
    1,929.76
    
    
    
    6,750.00
    
    
    
    07/01/05
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equipment Loan
    
    
    20,833.33
    
    
    
    20,833.33
    
    
    
    04/01/08
    
    
    
    70,257
    
    
    
    273,328
    
    
    
    260,883
    
    
    
    84,203
    
    
    
    
    
    
    
    688,671Equipment Loan
    
    
    10,416.67
    
    
    
    10,416.67
    
    
    
    05/01/09
    
    
    
    38,610
    
    
    
    149,366
    
    
    
    141,128
    
    
    
    132,918
    
    
    
    52,939
    
    
    
    514,961Plus Interest
    
    Plus Interest154,963
    
    
    
    644,790
    
    
    
    538,491
    
    
    
    353,601
    
    
    
    841,517
    
    
    
    2,533,361
  13




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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Revenue Recognition.
     Inventory Valuation.
  14




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Allowance for Doubtful Accounts.
 Allowance for Rework and Warranty Costs.
 Deferred Taxes.
 Depreciation and Asset Impairment.
 CAUTIONARY STATEMENTS
  15




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ITEM 3.
    
    CONTROLS AND PROCEDURES
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PART II  OTHER INFORMATION
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  (d) Maximum Number(c) Total Number of
    
    (or ApproximateShares (or Units)
    
    Dollar Value) ofPurchased as Part
    
    Shares (or Units)(a) Total Number of
    
    (b) Average Price
    
    of Publicly
    
    that May Yet BeShares (or Units)
    
    Paid per Share (or
    
    Announced Plans
    
    Purchased Under thePeriod
    
    Purchased(1)
    
    Unit)
    
    or Programs
    
    Plans or ProgramsFeb. 1  Feb. 28,
2005
    
    
    8,662
    
    
    $
    4.70
    
    
    
    N/A
    
    
    
    N/AMarch 1
 March 31,
2005
    
    
    4,972
    
    
    $
    5.079
    
    
    
    N/A
    
    
    
    N/AMay 1  May 31, 2005
    
    
    6,448
    
    
    $
    4.25
    
    
    
    N/A
    
    
    
    N/AAugust 1
 August
31, 2005
    
    
    3,153
    
    
    $
    6.18
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    23,235
 
 (1)
    
    All of the shares were repurchased by the Company in connection with stock-for-stock option
exercises by three employees, one of which is an officer, and one director. 
 ITEM 6. EXHIBITS
  18




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SIGNATURES
  WINLAND ELECTRONICS, INC.(Company)Dated: November 9, 2005
    
    /s/ Lorin E. KruegerLorin E. Krueger, President and ChiefExecutive Officer (Principal ExecutiveOfficer)/s/ Jennifer A. ThompsonJennifer A. Thompson, Chief Financial Officer(Principal Financial and Accounting Officer)
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 EXHIBIT INDEX TO FORM 10-QSB
 For the fiscal quarter ended
September 30, 2005
    
    Commission File No. 0-18393
 
 WINLAND ELECTRONICS, INC.
 
 Exhibit No.
    
    Description31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 200232.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
of 200232.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
 20