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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 March 31, 2006
    
    Commission File Number: 0-15637
 WINLAND ELECTRONICS, INC.
  Minnesota
(state or other jurisdiction of
incorporation or organization)
    
    41-0992135
(I.R.S. Employer
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. EXHIBITSSIGNATURESCertification 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
 March 31
    
    
    December 312006
    
    
    2005(UNAUDITED)
    
    
    AUDITEDASSETSCurrent AssetsCash
    
    
    
    
    
    
    
    
    
    $
    1,326,003
    
    
    
    
    
    
    
    
    
    
    $
    865,181Accounts receivable, net
    
    
    
    
    
    
    
    
    
    
    3,329,037
    
    
    
    
    
    
    
    
    
    
    
    4,033,241Income tax receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,298InventoriesRaw materials
    
    
    3,264,286
    
    
    
    
    
    
    
    
    
    
    
    2,339,314Work in process
    
    
    860,270
    
    
    
    
    
    
    
    
    
    
    
    163,778Finished goods
    
    
    1,148,616
    
    
    
    
    
    
    
    
    
    
    
    1,212,297Allowance for obsolete inventory
    
    
    (226,700
    )
    
    
    
    
    
    
    
    
    
    
    (191,900
    )Total inventories
    
    
    
    
    
    
    
    
    
    
    5,046,472
    
    
    
    
    
    
    
    
    
    
    
    3,523,489Prepaid expenses
    
    
    
    
    
    
    
    
    
    
    498,695
    
    
    
    
    
    
    
    
    
    
    
    311,240Deferred taxes
    
    
    
    
    
    
    
    
    
    
    236,500
    
    
    
    
    
    
    
    
    
    
    
    236,500Total current assets
    
    
    
    
    
    
    
    
    
    
    10,436,707
    
    
    
    
    
    
    
    
    
    
    
    9,017,949Other Assets
    
    
    
    
    
    
    
    
    
    
    1,887
    
    
    
    
    
    
    
    
    
    
    
    1,408Property and Equipment, at cost:Land and land improvements
    
    
    382,901
    
    
    
    
    
    
    
    
    
    
    
    272,901Building
    
    
    3,041,103
    
    
    
    
    
    
    
    
    
    
    
    3,040,435Machinery and equipment
    
    
    5,694,188
    
    
    
    
    
    
    
    
    
    
    
    5,537,094Data processing equipment
    
    
    1,247,125
    
    
    
    
    
    
    
    
    
    
    
    1,205,585Office furniture and equipment
    
    
    413,503
    
    
    
    
    
    
    
    
    
    
    
    412,219Total property and equipment
    
    
    
    
    
    
    
    
    
    
    10,778,820
    
    
    
    
    
    
    
    
    
    
    
    10,468,234Less accumulated depreciation
    
    
    
    
    
    
    
    
    
    
    (5,715,881
    )
    
    
    
    
    
    
    
    
    
    
    (5,540,097
    )Net property and equipment
    
    
    
    
    
    
    
    
    
    
    5,062,939
    
    
    
    
    
    
    
    
    
    
    
    4,928,137Total assets
    
    
    
    
    
    
    
    
    
    $
    15,501,533
    
    
    
    
    
    
    
    
    
    
    $
    13,947,494
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WINLAND ELECTRONICS, INC.
BALANCE SHEETS
 March 31
    
    
    December 312006
    
    
    2005(UNAUDITED)
    
    
    AUDITEDLIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesCurrent maturities of long-term debt
    
    $
    517,069
    
    
    $
    537,537Accounts payable
    
    
    2,881,791
    
    
    
    1,486,998Accrued expenses:Compensation
    
    
    736,418
    
    
    
    801,116Other
    
    
    226,181
    
    
    
    200,180Total current liabilities
    
    
    4,361,459
    
    
    
    3,025,831Long Term LiabilitiesDeferred taxes
    
    
    261,900
    
    
    
    261,900Deferred revenue
    
    
    152,504
    
    
    
    154,539Long-term debt, less current maturities
    
    
    1,310,186
    
    
    
    1,424,863Total long-term liabilities
    
    
    1,724,590
    
    
    
    1,841,302Total liabilities
    
    
    6,086,049
    
    
    
    4,867,133Stockholders EquityCommon stock
    
    
    35,363
    
    
    
    35,279Additional paid-in capital
    
    
    4,189,054
    
    
    
    4,165,035Retained earnings
    
    
    5,191,067
    
    
    
    4,880,047Total stockholders equity
    
    
    9,415,484
    
    
    
    9,080,361Total liabilities and stockholders equity
    
    $
    15,501,533
    
    
    $
    13,947,494
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WINLAND ELECTRONICS, INC.
STATEMENTS OF INCOME
For the Three Months Ended March 31, 2006 and 2005
(UNAUDITED)
 2006
    
    
    2005Net sales
    
    $
    8,147,209
    
    
    $
    7,013,392Cost of sales
    
    
    6,491,428
    
    
    
    5,314,321Gross profit
    
    
    1,655,781
    
    
    
    1,699,071Operating expenses:General and administrative
    
    
    593,031
    
    
    
    509,417Sales and marketing
    
    
    413,905
    
    
    
    336,133Research and development
    
    
    146,823
    
    
    
    224,3181,153,759
    
    
    
    1,069,868Operating income
    
    
    502,022
    
    
    
    629,203Other income (expenses):Interest expense
    
    
    (28,783
    )
    
    
    (29,809
    )Other, net
    
    
    12,382
    
    
    
    14,141(16,401
    )
    
    
    (15,668
    )Income before income taxes
    
    
    485,621
    
    
    
    613,535Income tax expense
    
    
    (174,600
    )
    
    
    (239,000
    )Net income
    
    $
    311,021
    
    
    $
    374,535Earnings per common share data:Basic
    
    $
    0.09
    
    
    $
    0.11Diluted
    
    
    0.09
    
    
    
    0.10Weighted-average number of common shares outstanding:Basic
    
    
    3,534,316
    
    
    
    3,452,709Diluted
    
    
    3,646,013
    
    
    
    3,598,896
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WINLAND ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2006 and 2005
(UNAUDITED)
 2006
    
    
    2005Cash Flows From Operating ActivitiesNet income
    
    $
    311,021
    
    
    $
    374,535Adjustments to reconcile net income to net cash
provided by operating activities:Non-cash stock-based compensation
    
    
    13,239
    
    
    
    Depreciation and amortization
    
    
    175,819
    
    
    
    139,187Loss on disposal of equipment
    
    
    
    
    
    
    120Investor relations expense, warrants issued
    
    
    3,123
    
    
    
    9,218Changes in assets and liabilities:Accounts receivable
    
    
    704,204
    
    
    
    (480,136
    )Income tax receivable
    
    
    48,298
    
    
    
    30,293Inventories
    
    
    (1,522,983
    )
    
    
    18,972Prepaid expenses
    
    
    (190,578
    )
    
    
    (95,487
    )Accounts payable
    
    
    1,394,793
    
    
    
    552,420Accrued expenses, including deferred
revenue and income taxes payable
    
    
    (40,733
    )
    
    
    35,657Net cash provided by operating activities
    
    
    896,203
    
    
    
    584,779Cash Flows From Investing ActivitiesPurchases of property and equipment
    
    
    (311,100
    )
    
    
    (217,955
    )Net cash used in investing activities
    
    
    (311,100
    )
    
    
    (217,955
    )Cash flows From Financing ActivitiesNet Principal payments on long-term borrowings, including
capital lease obligations
    
    
    (135,145
    )
    
    
    (376,428
    )Proceeds from issuance of common stock
    
    
    10,864
    
    
    
    139,035Net cash used in financing activities
    
    
    (124,281
    )
    
    
    (237,392
    )Net increase in cash
    
    
    460,822
    
    
    
    129,432CashBeginning
    
    
    865,181
    
    
    
    457,576End
    
    $
    1,326,003
    
    
    $
    587,008Supplemental Disclosures of Cash Flow InformationCash payments for:Interest
    
    $
    29,259
    
    
    $
    29,812Income taxes
    
    
    67,402
    
    
    
    41,000Supplemental Schedule of Noncash Financing ActivitiesWarrants Issued in Connection with Investors RelationsServices 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
  Note 4. Major Customers and Enterprisewide Disclosures
 Major Customers:
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Enterprisewide Disclosures:
 Three Months Ended
    
    
    Three Months EndedMarch 31, 2006
    
    
    March 31, 2005Proprietary microprocessors and mechanically
controlled sensors and alarms
    
    $
    837,614
    
    
    $
    742,660Electronic controls
and assemblies for OEM customers
    
    
    7,223,344
    
    
    
    6,153,172Engineering Design Services
    
    
    65,152
    
    
    
    100,629Freight Out
    
    
    21,099
    
    
    
    16,931$
    8,147,209
    
    
    $
    7,013,392
 Note 5. Allowance for Rework and Warranty Costs
 Allowance for Rework and Warranty Costs:
  Three Months Ended March 31,2006
    
    
    2005Balance, Beginning
    
    $
    117,300
    
    
    $
    128,000Accruals for products Sold
    
    
    500
    
    
    
    50,744Charges in accruals for pre-existing warranties
    
    
    
    
    
    
    (41,164
    )Balance, Ending
    
    $
    117,800
    
    
    $
    137,580
 Note 6. Warrants and Stock-Based Compensation Plans
 Warrants:
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Stock option plans:
      8




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Three Months Ended March 31,2006
    
    
    2005Expected life, in years
    
    
    4.95
    
    
    
    4.67Expected volatility
    
    
    97.27
    %
    
    
    98.04
    %Risk-free interest rate
    
    
    3.94
    %
    
    
    3.91
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
      For the Three Months EndedMarch 31, 2005Net income, as reported
    
    $
    374,535Deduct: Total stock-based compensation expenseDetermined under fair value based method for allAwards, net of related tax effects
    
    
    Pro forma net income
    
    $
    374,535Earnings per share:Basic, as reported
    
    $
    .11Basic, pro forma
    
    $
    .11Diluted, as reported
    
    $
    .10Diluted, pro forma
    
    $
    .10
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Weighted-AverageNumber of
    
    
    Weighted-Average
    
    
    RemainingShares
    
    
    Exercise Price
    
    
    Contract LifeOutstanding options atJanuary 1, 2006
    
    
    265,571
    
    
    $
    2.37Granted
    
    
    18,000
    
    
    $
    3.35Exercised
    
    
    (10,168
    )
    
    $
    1.76Forfeited
    
    
    Outstanding options at March 31, 2006
    
    
    273,403
    
    
    $
    2.34
    
    
    3.16 YrsOutstanding exercisable at
March 31, 2006
    
    
    194,283
    
    
    $
    2.36
    
    
    2.93 Yrs
   Number of
    
    
    Weighted-AverageShares
    
    
    Grant-Date Fair ValueNon-vested Stock options at January 1, 2006
    
    
    63,760
    
    
    $
    1.47Granted
    
    
    18,000
    
    
    $
    2.46Vested
    
    
    (2,640
    )
    
    $
    ( .96
    )ForfeitedNon-vested stock options at March 31, 2006
    
    
    79,120
    
    
    $
    1.71
 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 ended March 31, 2006 vs.
Three months ended March 31, 2005
 Net Sales:
 12




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Cost of Sales:
  Gross Profits:
 Operating Expenses:
  13




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Interest Expense:
 Net Income:
   LIQUIDITY AND CAPITAL RESOURCES
     14




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2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010+
    
    
    TotalUs Bank  Mortgage
    
    
    102,360
    
    
    
    136,480
    
    
    
    136,480
    
    
    
    136,480
    
    
    
    652,098
    
    
    
    1,163,898Wells Fargo Leasing
- Equipment
    
    
    62,266
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,266M&I Bank  Equipment
    
    
    203,915
    
    
    
    260,883
    
    
    
    84,203
    
    
    
    
    
    
    
    
    
    
    
    549,000M&I Bank  Equipment
    
    
    111,339
    
    
    
    141,128
    
    
    
    132,918
    
    
    
    52,939
    
    
    
    
    
    
    
    438,324Total
    
    
    479,880
    
    
    
    538,491
    
    
    
    353,601
    
    
    
    189,419
    
    
    
    652,098
    
    
    
    2,213,488
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Revenue Recognition.
     Inventory Valuation.
  16




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Allowance for Doubtful Accounts.
 Allowance for Rework and Warranty Costs.
 Deferred Taxes.
 Depreciation and Asset Impairment.
 Stock Based Compensation.
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CAUTIONARY STATEMENTS
      18




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ITEM 3. CONTROLS AND PROCEDURES
     
 PART II  OTHER INFORMATION
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   (d) MaximumNumber (orApproximate(c) Total Number
    
    Dollar Value) ofof Shares (or
    
    Shares (or Units)(a) Total Number
    
    
    
    
    
    Units) Purchased
    
    that May Yet Beof Shares (or
    
    (b) Average Price
    
    as Part of Publicly
    
    Purchased UnderUnits)
    
    Paid per Share (or
    
    Announced Plans
    
    the Plans orPeriod
    
    Purchased(1)
    
    Unit)
    
    or Programs
    
    ProgramsJan. 1 - Jan. 31,
2006
    
    
    1,737
    
    
    $
    4.03
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    1,737
    
    
    $
    4.03
 
 (1)
    
    All of the shares were repurchased by the Company in connection with stock-for-stock option
exercises by one employee. 19




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ITEM 6. EXHIBITS
  20




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SIGNATURES
  WINLAND ELECTRONICS, INC.(Company)Dated: May 11, 2006
    
    /s/ Lorin E. KruegerLorin E. Krueger, President and Chief
Executive Officer(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. 0-15637March 31, 2006
 
 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
 
 22