##### 



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, 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




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PART I  FINANCIAL INFORMATION
 ITEM 1: FINANCIAL STATEMENTS
 WINLAND ELECTRONICS, INC.
 BALANCE SHEETS
 June 30,
    
    
    December 31,2005
    
    
    2004(UNAUDITED)ASSETSCurrent AssetsCash
    
    
    
    
    
    $
    1,646,138
    
    
    
    
    
    
    $
    457,576Accounts receivable, net
    
    
    
    
    
    
    3,010,517
    
    
    
    
    
    
    
    2,774,373Income tax receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,293InventoriesRaw materials
    
    
    2,292,844
    
    
    
    
    
    
    
    1,697,483Work in process
    
    
    457,260
    
    
    
    
    
    
    
    257,050Finished goods
    
    
    1,391,869
    
    
    
    
    
    
    
    1,573,614Allowance for obsolete inventory
    
    
    (152,400
    )
    
    
    
    
    
    
    (150,000
    )Total inventories
    
    
    
    
    
    
    3,989,573
    
    
    
    
    
    
    
    3,378,147Prepaid expenses
    
    
    
    
    
    
    555,335
    
    
    
    
    
    
    
    285,337Deferred taxes
    
    
    
    
    
    
    197,700
    
    
    
    
    
    
    
    197,700Total current assets
    
    
    
    
    
    
    9,399,263
    
    
    
    
    
    
    
    7,123,426Other Assets
    
    
    
    
    
    
    74
    
    
    
    
    
    
    
    85Property and Equipment, at cost:Land and land improvements
    
    
    272,901
    
    
    
    
    
    
    
    272,901Building
    
    
    3,040,435
    
    
    
    
    
    
    
    3,002,880Machinery and equipment
    
    
    4,831,004
    
    
    
    
    
    
    
    4,675,060Data processing equipment
    
    
    1,428,023
    
    
    
    
    
    
    
    1,372,474Office furniture and equipment
    
    
    407,309
    
    
    
    
    
    
    
    366,915Total property and equipment
    
    
    
    
    
    
    9,979,672
    
    
    
    
    
    
    
    9,690,230Less accumulated depreciation
    
    
    
    
    
    
    (5,716,111
    )
    
    
    
    
    
    
    (5,447,274
    )Net property and equipment
    
    
    
    
    
    
    4,263,561
    
    
    
    
    
    
    
    4,242,956Total assets
    
    
    
    
    
    $
    13,662,898
    
    
    
    
    
    
    $
    11,366,467
  2




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##### 



WINLAND ELECTRONICS, INC.
 BALANCE SHEETS
 June 30,
    
    December 31,2005
    
    2004(UNAUDITED)LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesRevolving credit agreement
    
    
    
    
    
    
    270,000Current maturities of long-term debt
    
    $
    545,783
    
    
    $
    396,017Accounts payable
    
    
    1,591,266
    
    
    
    960,423Accrued expenses:Compensation
    
    
    850,212
    
    
    
    618,411Other
    
    
    602,600
    
    
    
    261,173Total current liabilities
    
    
    3,589,861
    
    
    
    2,236,024Long Term LiabilitiesLong-term debt, less current maturities
    
    
    1,697,028
    
    
    
    1,579,610Deferred taxes
    
    
    263,800
    
    
    
    263,800Deferred revenue
    
    
    158,608
    
    
    
    162,678Total long-term liabilities
    
    
    2,119,436
    
    
    
    2,006,088Total liabilities
    
    
    5,709,297
    
    
    
    4,512,112Stockholders EquityCommon stock
    
    
    35,156
    
    
    
    34,239Additional paid-in capital
    
    
    4,146,401
    
    
    
    3,989,425Retained earnings
    
    
    3,772,044
    
    
    
    2,830,691Total stockholders equity
    
    
    7,953,601
    
    
    
    6,854,355Total liabilities and stockholders equity
    
    $
    13,662,898
    
    
    $
    11,366,467
  3




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##### 



WINLAND ELECTRONICS, INC.
 STATEMENTS OF INCOME
For the Three Months Ended June 30, 2005 and 2004
(UNAUDITED)
 2005
    
    2004Net sales
    
    $
    7,129,363
    
    
    $
    5,829,285Cost of sales
    
    
    5,250,478
    
    
    
    4,840,177Gross profit
    
    
    1,878,885
    
    
    
    989,108Operating expenses:General and administrative
    
    
    448,566
    
    
    
    357,831Sales and marketing
    
    
    340,567
    
    
    
    313,961Research and development
    
    
    174,852
    
    
    
    160,033963,985
    
    
    
    831,825Operating income
    
    
    914,900
    
    
    
    157,283Other income (expenses):Interest expense
    
    
    (30,164
    )
    
    
    (34,152
    )Other, net
    
    
    44,703
    
    
    
    13,73514,539
    
    
    
    (20,417
    )Income before
income taxes
    
    
    929,439
    
    
    
    136,866Income tax expense
    
    
    (362,900
    )
    
    
    (58,000
    )Net income
    
    $
    566,539
    
    
    $
    78,866Earnings per common share data:Basic
    
    $
    0.16
    
    
    $
    0.02Diluted
    
    
    0.16
    
    
    
    0.02Weighted-average number of common shares outstanding:Basic
    
    
    3,508,073
    
    
    
    3,358,788Diluted
    
    
    3,631,577
    
    
    
    3,538,104
  4




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##### 



WINLAND ELECTRONICS, INC.
 STATEMENTS OF INCOME
For the Six Months Ended June 30, 2005 and 2004
(UNAUDITED)
 2005
    
    2004Net sales
    
    $
    14,142,755
    
    
    $
    11,011,455Cost of sales
    
    
    10,564,622
    
    
    
    8,610,077Gross profit
    
    
    3,578,133
    
    
    
    2,401,378Operating expenses:General and administrative
    
    
    957,984
    
    
    
    825,418Sales and marketing
    
    
    676,700
    
    
    
    630,499Research and development
    
    
    399,068
    
    
    
    415,7332,033,752
    
    
    
    1,871,650Operating income
    
    
    1,544,381
    
    
    
    529,728Other income (expenses):Interest expense
    
    
    (59,973
    )
    
    
    (64,182
    )Other, net
    
    
    58,845
    
    
    
    21,844(1,128
    )
    
    
    (42,338
    )Income before
income taxes
    
    
    1,543,253
    
    
    
    487,390Income tax expense
    
    
    (601,900
    )
    
    
    (190,000
    )Net income
    
    $
    941,353
    
    
    $
    297,390Earnings per common share data:Basic
    
    $
    0.27
    
    
    $
    0.09Diluted
    
    
    0.26
    
    
    
    0.08Weighted-average number of common shares outstanding:Basic
    
    
    3,480,544
    
    
    
    3,358,169Diluted
    
    
    3,622,411
    
    
    
    3,563,973
  5




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WINLAND ELECTRONICS, INC.
 STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2005 and 2004
(UNAUDITED)
 2005
    
    2004Cash Flows From Operating ActivitiesNet income
    
    $
    941,353
    
    
    $
    297,390Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    278,521
    
    
    
    322,432(Gain) loss on disposal of equipment
    
    
    120
    
    
    
    (6,142
    )Investor relations expense, warrants issued
    
    
    18,588
    
    
    
    10,794Deferred taxes
    
    
    
    
    
    
    (14,000
    )Changes in assets and liabilities:Accounts receivable
    
    
    (236,144
    )
    
    
    (724,298
    )Income tax receivable
    
    
    30,293
    
    
    
    117,627Inventories
    
    
    (611,426
    )
    
    
    (1,857,951
    )Prepaid expenses
    
    
    (251,108
    )
    
    
    (77,810
    )Accounts payable
    
    
    630,843
    
    
    
    970,668Accrued expenses, including deferred
revenue and income taxes payable
    
    
    569,158
    
    
    
    (210,185
    )Net cash provided by operating activities
    
    
    1,370,198
    
    
    
    (1,171,475
    )Cash Flows From Investing ActivitiesPurchases of property and equipment
    
    
    (299,235
    )
    
    
    (1,189,249
    )Proceeds from the sale of equipment
    
    
    
    
    
    
    7,000Net cash used in investing activities
    
    
    (299,235
    )
    
    
    (1,182,249
    )Cash flows From Financing ActivitiesNet borrowings (payments) on revolving line of credit
    
    
    (270,000
    )
    
    
    470,000Proceeds from note payable to bank
    
    
    500,000
    
    
    
    1,000,000Payments on long-term borrowings, including capital
lease obligations
    
    
    (232,816
    )
    
    
    (336,689
    )Proceeds from issuance of common stock
    
    
    120,415
    
    
    
    14,246Net cash used in financing activities
    
    
    117,599
    
    
    
    1,147,557Net increase (decrease) in cash
    
    
    1,188,562
    
    
    
    (1,206,167
    )CashBeginning
    
    
    457,576
    
    
    
    1,412,058End
    
    $
    1,646,138
    
    
    $
    205,891Supplemental Disclosures of Cash Flow InformationCash payments for:Interest
    
    $
    59,973
    
    
    $
    64,106Income taxes
    
    
    110,661
    
    
    
    173,750Supplemental Schedule of Noncash Financing ActivitiesWarrants Issued in Connection with Investors RelationsServices to be Provided
    
    $
    37,477
    
    
    $
    
  6




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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
   7




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Note 4. Major Customers and Enterprisewide Disclosures
 Major Customers:
 Enterprisewide
Disclosures:
 Three Months Ended
    
    Three Months EndedJune 30, 2005
    
    June 30, 2004Proprietary microprocessors and mechanically
controlled sensors and alarms
    
    $
    699,815
    
    
    $
    561,506Electronic controls and assemblies for
OEM customers
    
    
    6,312,742
    
    
    
    5,213,291Engineering Design Services
    
    
    101,583
    
    
    
    26,147Freight Out
    
    
    15,223
    
    
    
    28,341$
    7,129,363
    
    
    $
    5,829,285
 Six Months Ended
    
    Six Months EndedJune 30, 2005
    
    June 30, 2004Proprietary microprocessors and mechanically
controlled sensors and alarms
    
    $
    1,442,475
    
    
    $
    1,229,138Electronic controls and assemblies for
OEM customers
    
    
    12,465,913
    
    
    
    9,678,212Engineering Design Services
    
    
    202,213
    
    
    
    55,335Freight Out
    
    
    32,154
    
    
    
    48,770$
    14,142,755
    
    
    $
    11,011,455
 Note 5. Warrants and Stock-Based Compensation Plans
 Warrants:
 8




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Stock-Based Compensation Plans:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net Income:As reported
    
    $
    566,539
    
    
    $
    78,866
    
    
    $
    941,353
    
    
    $
    297,390Deduct total stock-based employee compensation
expense determined under the fair value-based
method for all awards net of related tax effects
    
    
    (47,238
    )
    
    
    (25,189
    )
    
    
    (52,521
    )
    
    
    (36,838
    )Pro forma
    
    $
    519,301
    
    
    $
    53,677
    
    
    $
    888,832
    
    
    $
    260,552Basic Earnings per shareAs reported
    
    $
    0.16
    
    
    $
    0.02
    
    
    $
    0.27
    
    
    $
    0.09Pro forma
    
    $
    0.15
    
    
    $
    0.02
    
    
    $
    0.26
    
    
    $
    0.08Diluted Earnings per shareAs reported
    
    $
    0.16
    
    
    $
    0.02
    
    
    $
    0.26
    
    
    $
    0.08Pro forma
    
    $
    0.14
    
    
    $
    0.02
    
    
    $
    0.25
    
    
    $
    0.07
 Note 6. New Accounting Standards
  9




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Accounting Changes and Error Corrections Accounting Changes Reporting
Accounting Changes in Interim Financial Statements
 ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Overview
  Executive Summary
  10




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RESULTS OF OPERATIONS
Three months and six months ended June 30, 2005 vs.
Three months and six months ended June 30, 2004
 Net Sales
    Cost of Sales
 11




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Gross Profits
 Operating Expenses
  12




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Interest Expense
 Net Income
   LIQUIDITY AND CAPITAL RESOURCES
   13




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Payments due by period2009Contractual
    
    
    
    
    
    Remainder
    
    
    
    
    
    
    
    
    
    
    
    
    
    andObligations
    
    Total
    
    of 2005
    
    2006
    
    2007
    
    2008
    
    ThereafterTotal contractual
cash obligations
    
    $
    2,670,053
    
    
    $
    292,192
    
    
    $
    644,147
    
    
    $
    538,132
    
    
    $
    353,452
    
    
    $
    842,130
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Revenue Recognition.
  14




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Inventory Valuation.
  Allowance for Doubtful Accounts.
 Allowance for Rework and Warranty Costs.
 15




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Deferred Taxes.
 Depreciation and Asset Impairment.
 CAUTIONARY STATEMENTS
    16




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ITEM 3.
    
    CONTROLS AND PROCEDURES
       17




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PART
II  OTHER INFORMATION
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    Number of
    
    Number ofNominee
    
    Votes For
    
    Votes WithheldThomas J. de Petra
    
    
    3,153,686
    
    
    
    92,040S. Robert Dessalet
    
    
    3,234,046
    
    
    
    11,680Lorin E. Krueger
    
    
    3,231,102
    
    
    
    14,624James L. Reissner
    
    
    3,230,512
    
    
    
    15,214Richard T. Speckman
    
    
    3,234,512
    
    
    
    11,214
  ITEM 5.
    
    OTHER INFORMATION
  ITEM 6.
    
    EXHIBITS
  18




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SIGNATURES
  WINLAND ELECTRONICS, INC.(Company)Dated: August 11, 2005
    
    /s/ Lorin E. KruegerLorin E. Krueger, President and
Chief Executive Officer (Principal Executive Officer)/s/ Jennifer A. ThompsonJennifer A. Thompson, Chief Financial Officer(Principal Financial and Accounting Officer)
 19




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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 EXHIBIT INDEX TO FORM 10-QSB
 For the fiscal quarter ended
June 30, 2005
    
    Commission File No. 0-18393
 
 WINLAND ELECTRONICS, INC.
 Exhibit No.
    
    Description10.1
    
    Amendment No. 1 to Credit Agreement between the Company and M&I Marshall & Ilsley Bank
dated April 15, 2004 and Term Note dated April 15, 200410.2
    
    Amendment No. 2 to Credit Agreement between the Company and M&I Marshall & Ilsley Bank
dated June 25, 200410.3
    
    Amendment No. 3 to Credit Agreement between the Company and M&I Marshall & Ilsley Bank
dated August 3, 200410.4
    
    Amendment No. 4 to Credit Agreement between the Company and M&I Marshall & Ilsley Bank
dated February 23, 200510.5
    
    Amendment No. 5 to Credit Agreement between the Company and M&I Marshall & Ilsley Bank
dated April 4, 200510.6
    
    Amendment No.6 to Credit Agreement between the Company and M&I Marshall & Ilsley Bank dated
June 23, 200531.1
    
    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