##### 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 June 30, 2006
 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 5. OTHER INFORMATIONITEM 6. EXHIBITSSIGNATURESEXHIBIT INDEX TO FORM 10-QSBMaster Lease of Personal PropertyAmendment No. 7 to Credit AgreementAmendment No. 8 to Credit AgreementCertification 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.
CONDENSED BALANCE SHEETS
 June 30
    
    
    December 312006
    
    
    2005(UNAUDITED)ASSETSCurrent AssetsCash
    
    
    
    
    
    $
    337,096
    
    
    
    
    
    
    $
    865,181Accounts receivable, net
    
    
    
    
    
    
    4,457,367
    
    
    
    
    
    
    
    4,033,241Refundable Income taxes
    
    
    
    
    
    
    109,903
    
    
    
    
    
    
    
    48,298InventoriesRaw materials
    
    
    3,882,130
    
    
    
    
    
    
    
    2,339,314Work in process
    
    
    962,686
    
    
    
    
    
    
    
    163,778Finished goods
    
    
    1,286,575
    
    
    
    
    
    
    
    1,212,297Allowance for obsolete inventory
    
    
    (198,900
    )
    
    
    
    
    
    
    (191,900
    )Total inventories
    
    
    
    
    
    
    5,932,491
    
    
    
    
    
    
    
    3,523,489Prepaid expenses
    
    
    
    
    
    
    337,263
    
    
    
    
    
    
    
    311,240Deferred income taxes
    
    
    
    
    
    
    259,300
    
    
    
    
    
    
    
    236,500Total current assets
    
    
    
    
    
    
    11,433,420
    
    
    
    
    
    
    
    9,017,949Other Assets
    
    
    
    
    
    
    3,633
    
    
    
    
    
    
    
    1,408Property and Equipment, at cost:Land and land improvements
    
    
    382,901
    
    
    
    
    
    
    
    272,901Building
    
    
    3,041,103
    
    
    
    
    
    
    
    3,040,435Machinery and equipment
    
    
    6,356,817
    
    
    
    
    
    
    
    5,537,094Data processing equipment
    
    
    1,004,369
    
    
    
    
    
    
    
    1,205,585Office furniture and equipment
    
    
    418,109
    
    
    
    
    
    
    
    412,219Total property and equipment
    
    
    
    
    
    
    11,203,299
    
    
    
    
    
    
    
    10,468,234Less accumulated depreciation
    
    
    
    
    
    
    (5,647,454
    )
    
    
    
    
    
    
    (5,540,097
    )Net property and equipment
    
    
    
    
    
    
    5,555,845
    
    
    
    
    
    
    
    4,928,137Total assets
    
    
    
    
    
    $
    16,992,898
    
    
    
    
    
    
    $
    13,947,494
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WINLAND ELECTRONICS, INC.
CONDENSED BALANCE SHEETS
 June 30
    
    
    December 312006
    
    
    2005(UNAUDITED)LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesRevolving line of credit agreement
    
    $
    800,000
    
    
    $
    Current maturities of long-term debt
    
    
    496,560
    
    
    
    537,537Accounts payable
    
    
    2,974,197
    
    
    
    1,486,998Accrued expenses:Compensation
    
    
    644,295
    
    
    
    801,116Allowance for rework and warranty costs
    
    
    496,242
    
    
    
    117,300Other
    
    
    162,362
    
    
    
    82,880Total current liabilities
    
    
    5,573,656
    
    
    
    3,025,831Long Term LiabilitiesLong-term debt, less current maturities
    
    
    1,194,771
    
    
    
    1,424,863Deferred income taxes
    
    
    261,900
    
    
    
    261,900Deferred revenue
    
    
    150,468
    
    
    
    154,539Total long-term liabilities
    
    
    1,607,139
    
    
    
    1,841,302Stockholders EquityCommon stock
    
    
    35,699
    
    
    
    35,279Additional paid-in capital
    
    
    4,294,537
    
    
    
    4,165,035Retained earnings
    
    
    5,481,867
    
    
    
    4,880,047Total stockholders equity
    
    
    9,812,103
    
    
    
    9,080,361Total liabilities and
stockholders equity
    
    $
    16,992,898
    
    
    $
    13,947,494
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WINLAND ELECTRONICS, INC.
CONDENSED STATEMENTS OF INCOME
For the Three Months Ended June 30, 2006 and 2005
(UNAUDITED)
 2006
    
    
    2005Net sales
    
    $
    10,661,222
    
    
    $
    7,129,363Cost of sales
    
    
    9,054,234
    
    
    
    5,250,478Gross profit
    
    
    1,606,988
    
    
    
    1,878,885Operating expenses:General and administrative
    
    
    618,472
    
    
    
    448,566Sales and marketing
    
    
    389,972
    
    
    
    340,567Research and development
    
    
    120,329
    
    
    
    174,8521,128,773
    
    
    
    963,985Operating income
    
    
    478,215
    
    
    
    914,900Other income (expenses):Interest expense
    
    
    (30,596
    )
    
    
    (30,164
    )Other, net
    
    
    (7,820
    )
    
    
    44,803(38,416
    )
    
    
    14,639Income before income taxes
    
    
    439,799
    
    
    
    929,539Income tax expense
    
    
    (149,000
    )
    
    
    (363,000
    )Net income
    
    $
    290,799
    
    
    $
    566,539Earnings per common share:Basic
    
    $
    0.08
    
    
    $
    0.16Diluted
    
    
    0.08
    
    
    
    0.16Weightedaverage number of common shares outstanding:Basic
    
    
    3,563,164
    
    
    
    3,508,073Diluted
    
    
    3,669,749
    
    
    
    3,631,577
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WINLAND ELECTRONICS, INC.
CONDENSED STATEMENTS OF INCOME
For the Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
 2006
    
    
    2005Net sales
    
    $
    18,808,431
    
    
    $
    14,142,755Cost of sales
    
    
    15,545,662
    
    
    
    10,564,622Gross profit
    
    
    3,262,769
    
    
    
    3,578,133Operating expenses:General and administrative
    
    
    1,211,504
    
    
    
    957,984Sales and marketing
    
    
    803,877
    
    
    
    676,700Research and development
    
    
    267,151
    
    
    
    399,0682,282,532
    
    
    
    2,033,752Operating income
    
    
    980,237
    
    
    
    1,544,381Other income (expenses):Interest expense
    
    
    (59,379
    )
    
    
    (59,973
    )Other, net
    
    
    4,963
    
    
    
    58,945(54,416
    )
    
    
    (1,028
    )Income before income taxes
    
    
    925,821
    
    
    
    1,543,353Income tax expense
    
    
    (324,000
    )
    
    
    (602,000
    )Net income
    
    $
    601,821
    
    
    $
    941,353Earnings per common share:Basic
    
    $
    0.17
    
    
    $
    0.27Diluted
    
    
    0.16
    
    
    
    0.26Weightedaverage number of common shares outstanding:Basic
    
    
    3,548,819
    
    
    
    3,480,544Diluted
    
    
    3,660,037
    
    
    
    3,622,411
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WINLAND ELECTRONICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
 2006
    
    
    2005Cash Flows From Operating ActivitiesNet income
    
    $
    601,821
    
    
    $
    941,353Adjustments to reconcile net income to net cash
provided by operating activities:Non-cash stock based compensation
    
    
    91,448
    
    
    
    Depreciation and amortization
    
    
    366,961
    
    
    
    278,521Loss on disposal of equipment
    
    
    6,005
    
    
    
    120Investor relations expense, non-cash warrant expense
    
    
    3,123
    
    
    
    18,588Deferred tax assets
    
    
    (22,800
    )
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (424,126
    )
    
    
    (236,144
    )Income tax receivable
    
    
    (61,605
    )
    
    
    30,293Inventories
    
    
    (2,409,002
    )
    
    
    (611,426
    )Prepaid expenses
    
    
    (29,146
    )
    
    
    (251,108
    )Accounts payable
    
    
    1,487,199
    
    
    
    630,843Accrued expenses, including deferred
revenue and income taxes payable
    
    
    297,532
    
    
    
    569,158Net cash provided by (used in) operating activities
    
    
    (92,590
    )
    
    
    1,370,198Cash Flows From Investing ActivitiesPurchases of property and equipment
    
    
    (1,002,898
    )
    
    
    (299,235
    )Cash flows From Financing ActivitiesNet borrowings (payments) on revolving line of credit
    
    
    800,000
    
    
    
    (270,000
    )Proceeds from note payable to bank
    
    
    
    
    
    
    500,000Payments on long-term borrowings, including capital
lease obligations
    
    
    (271,069
    )
    
    
    (232,816
    )Proceeds from issuance of common stock
    
    
    38,472
    
    
    
    120,415Net cash provided in financing activities
    
    
    567,403
    
    
    
    117,599Net increase (decrease) in cash
    
    
    (528,085
    )
    
    
    1,188,562CashBeginning
    
    
    865,181
    
    
    
    457,576Ending
    
    $
    337,096
    
    
    $
    1,646,138Supplemental Disclosures of Cash Flow InformationCash payments for:Interest
    
    $
    59,379
    
    
    
    59,973Income taxes
    
    
    408,402
    
    
    
    110,661Supplemental 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 CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
 Note 1. Basis of Presentation
    Note 2. Earnings Per Common Share
  Note 3. Financing Arrangement
  ,
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Note 4. Major Customers and Enterprise-wide Disclosures
 Major Customers:
 Three Months Ended
    
    Three Months EndedJune 30, 2006
    
    June 30, 2005Sales percentage:Customer A
    
    
    38
    %
    
    
    54
    %Customer B
    
    
    26
    %
    
    
    0
    %
 Six Months Ended
    
    Six Months EndedJune 30, 2006
    
    June 30, 2005Sales percentage:Customer A
    
    
    43
    %
    
    
    56
    %Customer B
    
    
    19
    %
    
    
    0
    %
  June 30, 2006
    
    June 30, 2005Accounts receivable percentage:Customer A
    
    
    24
    %
    
    
    36
    %Customer B
    
    
    29
    %
    
    
    0
    %
 Enterprisewide Disclosures:
 Three Months Ended
    
    
    Three Months EndedJune 30, 2006
    
    
    June 30, 2005Proprietary microprocessors and mechanically
controlled sensors and alarms
    
    $
    780,838
    
    
    $
    699,815Electronic controls and assemblies for
OEM customers
    
    
    9,814,953
    
    
    
    6,312,742Engineering Design Services
    
    
    46,577
    
    
    
    101,583Freight Out
    
    
    18,853
    
    
    
    15,223$
    10,661,222
    
    
    $
    7,129,363
 Six Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2005Proprietary microprocessors and mechanically
controlled sensors and alarms
    
    $
    1,618,452
    
    
    $
    1,442,475Electronic controls and assemblies for
OEM customers
    
    
    16,996,515
    
    
    
    12,465,913Engineering Design Services
    
    
    153,512
    
    
    
    202,213Freight Out
    
    
    39,952
    
    
    
    32,154$
    18,808,431
    
    
    $
    14,142,755
 Note 5. Allowance for Rework and Warranty Costs
 Allowance for Rework and Warranty Costs:
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Three Months Ended June 30,2006
    
    2005Balance, Beginning
    
    $
    117,800
    
    
    $
    137,580Accruals for products Sold
    
    
    456,173
    
    
    
    (4,128
    )Charges in accruals for pre-existing warranties
    
    
    (77,731
    )
    
    
    (13,727
    )Balance, Ending
    
    $
    496,242
    
    
    $
    119,725
 Six Months Ended June 30,2006
    
    2005Balance, Beginning
    
    $
    117,300
    
    
    $
    128,000Accruals for products Sold
    
    
    456,673
    
    
    
    46,357Charges in accruals for pre-existing warranties
    
    
    (77,731
    )
    
    
    (54,632
    )Balance, Ending
    
    $
    496,242
    
    
    $
    119,725
 Note 6. Warrants and Stock-Based Compensation Plans
 Warrants:
  9




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Stock option and employee stock purchase plans:
     10




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Six Months Ended June 30,2006
    
    2005Expected life, in years
    
    
    5.62
    
    
    
    7.46Expected volatility
    
    
    80.18
    %
    
    
    92.81
    %Risk-free interest rate
    
    
    4.70
    %
    
    
    3.98
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
      For the Six Months EndedJune 30, 2005Net income, as reported
    
    $
    941,353Deduct: Total stock-based compensation expenseDetermined under fair value based method for allAwards, net of related tax effects
    
    
    (52,521
    )Pro forma net income
    
    $
    888,832Earnings per share:Basic, as reported
    
    $
    .27Basic, pro forma
    
    $
    .26Diluted, as reported
    
    $
    .26Diluted, pro forma
    
    $
    .25
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Weighted-AverageNumber of
    
    
    Weighted-Average
    
    
    RemainingShares
    
    
    Exercise Price
    
    
    Contract LifeOutstanding options atJanuary 1, 2006
    
    
    265,571
    
    
    $
    2.25Granted
    
    
    40,000
    
    
    $
    3.97Exercised
    
    
    (45,031
    )
    
    $
    1.39Forfeited
    
    
    Outstanding options at June 30, 2006
    
    
    260,540
    
    
    $
    2.66
    
    
    3.79 YrsOutstanding exercisable at
June 30, 2006
    
    
    186,020
    
    
    $
    2.83
    
    
    3.92 Yrs
  Note 7. New Accounting Standards
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ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Overview
   Executive Summary
   RESULTS OF OPERATIONS
Three months and six months ended June 30, 2006 vs.
Three months and six months ended June 30, 2005
 Net Sales
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Cost of Sales
 Gross Profits
 Operating Expenses
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Interest Expense
 Net Income
  16




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LIQUIDITY AND CAPITAL RESOURCES
      2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010+
    
    
    TotalUS Bank  Mortgage
    
    
    68,240
    
    
    
    136,480
    
    
    
    136,480
    
    
    
    136,480
    
    
    
    652,098
    
    
    
    1,129,778Wells Fargo Leasing
 Equipment
    
    
    38,916
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,916M&I Bank Loan 
Equipment
    
    
    186,119
    
    
    
    402,011
    
    
    
    217,121
    
    
    
    52,939
    
    
    
    
    
    
    
    858,190M&I Equipment
Finance  Leased
Equipment
    
    
    53,146
    
    
    
    142,975
    
    
    
    142,975
    
    
    
    142,975
    
    
    
    232,803
    
    
    
    714,874Total
    
    
    346,421
    
    
    
    681,466
    
    
    
    496,576
    
    
    
    332,394
    
    
    
    884,901
    
    
    
    2,741,757
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Revenue Recognition.
     Inventory Valuation.
  18




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Allowance for Doubtful Accounts.
 Allowance for Rework and Warranty Costs.
 Allowance for EnviroAlert Product Enhancement.
 Deferred Taxes.
 Depreciation and Asset Impairment.
 Stock Based Compensation.
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CAUTIONARY STATEMENTS
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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) MaximumNumber (or(c) Total Number of
    
    Approximate DollarShares (or Units)
    
    Value) of Shares (or(a) Total Number
    
    (b) Average Price
    
    Purchased as Part of
    
    Units) that May Yetof Shares (or Units)
    
    Paid per Share (or
    
    Publicly Announced
    
    Be Purchased UnderPeriod
    
    Purchased(1)
    
    Unit)
    
    Plans or Programs
    
    the Plans or ProgramsApr. 1  Apr. 30,
2006
    
    
    4,776
    
    
    $
    5.65
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    4,776
    
    
    $
    5.65
    
    
    
    N/A
    
    
    
    N/A
 
 (1)
    
    All of the shares were repurchased by the Company in connection with stock-for-stock option
exercises by one employee.
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    Number of
    
    Number ofNominee
    
    Votes For
    
    Votes WithheldThomas J. de Petra
    
    
    3,290,660
    
    
    
    27,311S. Robert Dessalet
    
    
    3,290,440
    
    
    
    27,531Lorin E. Krueger
    
    
    3,293,410
    
    
    
    24,561James L. Reissner
    
    
    3,289,660
    
    
    
    28,311Richard T. Speckman
    
    
    3,293,660
    
    
    
    24,311
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ITEM 5. OTHER INFORMATION
    
 ITEM 6. EXHIBITS
  24




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SIGNATURES
  WINLAND ELECTRONICS, INC.(Company)Dated: August 10, 2006
    
    /s/ Lorin E. KruegerLorin E. Krueger, President and
Chief ExecutiveOfficer (Principal Executive Officer)/s/ Brian D. LawrenceBrian D. Lawrence, 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
    
    Commission File No. 0-15637June 30, 2006
 
 WINLAND ELECTRONICS, INC.
 
 Exhibit No.
    
    Description10.1
    
    Master Lease of Personal Property between the Company and M&I Equipment Finance Company
dated June 28, 200610.2
    
    Amendment No.7 to Credit Agreement between the Company and M&I Marshall & Ilsley Bank dated
February 2, 200610.3
    
    Amendment No.8 to Credit Agreement between the Company and M&I Marshall & Ilsley Bank dated
June 28, 2006 and Amended and Restated Revolving Note dated June 28, 2006.31.1
    
    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
 26