UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from ____________ to ____________
Commission File Number 1-8250
WELLS-GARDNER ELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
ILLINOIS 36-1944630
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2701 North Kildare Avenue, Chicago, Illinois 60639
(Address of principal executive offices) (Zip Code)
(773) 252-8220
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
As of October 30, 1998, 4,282,512 shares of the Common Stock, $1.00
par value of the registrant were outstanding.
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WELLS-GARDNER ELECTRONICS CORPORATION
FORM 10-Q
For Quarter Ended September 30, 1998
PART I - FINANCIAL INFORMATION
Item 1.
Index to Financial Statements:
Condensed Statements of Earnings
- Three Months Ended September 30, 1998 & 1997 (Unaudited)
- Nine Months Ended September 30, 1998 & 1997 (Unaudited)
Condensed Balance Sheets
- September 30, 1998 (Unaudited) & December 31, 1997 (Audited)
Condensed Statements of Cash Flows
- Nine Months Ended September 30, 1998 & 1997 (Unaudited)
Notes to the Condensed Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
Item 6.
Exhibits and Reports on Form 8-K
SIGNATURE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WELLS-GARDNER ELECTRONICS CORPORATION
Condensed Statements of Earnings
(Unaudited)
Three Months Ended September 30,
1998 1997
<S> <C> <C>
Net sales $ 9,965,000 $ 10,555,000
Cost of sales 8,379,000 8,961,000
Engineering, selling &
administrative expenses 1,325,000 1,317,000
Other expense, net 130,000 89,000
Total costs 9,834,000 10,367,000
Earnings before income taxes 131,000 188,000
Income taxes --- ---
Net earnings $ 131,000 $ 188,000
Earnings per share:
Basic net earnings per share $ 0.03 $ 0.05
Diluted net earnings per share $ 0.03 $ 0.04
Basic average common shares
outstanding 4,272,644 4,140,416
Diluted average common shares
outstanding 4,366,658 4,370,703
See accompanying notes to the unaudited condensed financial statements.
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WELLS-GARDNER ELECTRONICS CORPORATION
Condensed Statement of Earnings
(Unaudited)
Nine Months Ended September 30,
1998 1997
<S> <C> <C>
Net sales $ 31,931,000 $ 32,674,000
Cost of sales 26,701,000 27,464,000
Engineering, selling &
administrative expenses 4,032,000 4,247,000
Other (income) expense, net 366,000 218,000
Total costs 31,099,000 31,929,000
Earnings before income taxes 832,000 745,000
Income taxes --- ---
Net earnings $ 832,000 $ 745,000
Earnings per share:
Basic net earnings per share $ 0.20 $ 0.18
Diluted net earnings per share $ 0.19 $ 0.18
Basic average common shares
outstanding 4,245,596 4,100,396
Diluted average common shares
outstanding 4,443,117 4,247,463
See accompanying notes to the unaudited condensed financial statements.
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WELLS-GARDNER ELECTRONICS CORPORATION
Condensed Balance Sheets
(Unaudited) (Audited)
September 30, December 31,
1998 1997
<S> <C> <C> <C> <C>
Assets:
Current assets:
Cash & cash equivalents $ 75,000 $ 150,000
Accounts receivable (net) 5,849,000 5,232,000
Note receivable 225,000 375,000
Inventory:
Raw materials 5,892,000 6,253,000
Work in progress 876,000 451,000
Finished goods 2,772,000 2,552,000
9,540,000 9,256,000
Prepaids & other current assets 274,000 237,000
Total current assets 15,963,000 15,250,000
Property, plant & equipment, net 2,652,000 2,270,000
Other assets:
Long-term note receivable 317,000 ---
Intangible assets (net) 2,392,000 ---
Total other assets 2,709,000 ---
Total assets $ 21,324,000 $ 17,520,000
Liabilities:
Current liabilities:
Accounts payable $ 2,904,000 $ 3,453,000
Accrued expenses 989,000 882,000
Note payable 447,000 ---
Total current liabilities 4,340,000 4,335,000
Long-term liabilities:
Note payable 2,903,000 ---
Long-term note payable 1,500,000 1,800,000
Total long-term liabilities 4,403,000 1,800,000
Total liabilities 8,743,000 6,135,000
Shareholders' Equity:
Common stock-authorized 25,000,000
shares, $1.00 par value; 4,282,512
shares issued as of September 30,
1998 & 4,215,083 shares issued as
of December 31, 1997 4,283,000 4,215,000
Additional paid in capital 1,575,000 1,425,000
Retained earnings 6,765,000 5,933,000
Unearned compensation (42,000) (188,000)
Total shareholders' equity 12,581,000 11,385,000
Total liabilities & shareholders' equity $ 21,324,000 $ 17,520,000
See accompanying notes to the unaudited condensed financial statements.
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WELLS-GARDNER ELECTRONICS CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 832,000 $ 745,000
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 341,000 294,000
Amortization of unearned compensation 146,000 166,000
Changes in current assets & liabilities (net of
effective acquistion):
Accounts receivable (617,000) (2,670,000)
Note receivable 150,000 (103,000)
Inventory 163,000 (656,000)
Prepaid expenses & other current assets (37,000) 195,000
Accounts payable (549,000) 1,877,000
Accrued expenses 107,000 (156,000)
Net cash used in operating activities 536,000 (308,000)
Cash used in investing activities:
Note receivable (317,000) ---
Payment for acquisition (3,350,000) ---
Additions to property, plant & equipment, net (212,000) (214,000)
Net cash used in investing activities (3,879,000) (214,000)
Cash provided by financing activities:
Borrowings (repayments) - note payable (300,000) 375,000
Proceeds from note payable 3,350,000 ---
Proceeds from stock options exercised 218,000 219,000
Net cash provided by financing activities 3,268,000 594,000
Net increase in cash & cash equivalents (75,000) 72,000
Cash & cash equivalents at beginning of period 150,000 57,000
Cash & cash equivalents at end of period $ 75,000 $ 129,000
Supplemental cash flow disclosure:
Interest paid $ 290,000 $ 165,000
Taxes paid $ 15,000 $ ---
See accompanying notes to the unaudited condensed financial statements.
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WELLS-GARDNER ELECTRONICS CORPORATION
Notes to the Condensed Financial Statements
1. In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments (consisting of normal
recurring accruals), which are necessary for a fair statement of
results for the periods presented. Certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. These condensed financial statements should be
read in conjunction with the audited financial statements and notes
thereto included in the Company's 1997 Annual Report to shareholders.
The results of operations for the quarter and nine months ended
September 30, 1998 are not necessarily indicative of the operating
results for the full year.
2. Basic earnings per share is based on the weighted average number of
shares outstanding whereas diluted earnings per share includes the
dilutive effect of unexercised common stock equivalents.
3. On June 5, 1998, the Company acquired the mechanical coin door and
mechanical coin mechanism business of Coin Controls, Inc. (the
"Business"). The Business consists of the manufacturing, service,
sales and marketing of mechanical coin door and coin mechanisms.
These products are sold to the coin-operated video gaming, pinball,
redemption and other markets. Under the terms of the agreement,
Wells-Gardner acquired certain inventory, machinery, equipment,
tooling and certain contract rights (ie: open purchase and sales
orders).
The following pro forma amounts for the nine months ended September
30, 1998 and 1997 are presented as if the acquisition of the Business
had been made at the beginning of each period presented. Such
unaudited pro forma information does not reflect actual results which
may have occurred if the acquisition had taken place at the beginning
of each period nor is it indicative of results of future operations.
Nine Months Ended September 30,
1998 1997
Net sales $ 34,135,000 $ 36,571,000
Net earnings $ 952,000 $ 808,000
Earnings per share:
Basic $ 0.22 $ 0.20
Diluted $ 0.21 $ 0.19
4. Certain 1997 expenses have been reclassified to conform to the
presentation in 1998.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Third Quarter & Nine Month Earnings Ended September 30, 1998 and 1997
For the third quarter ended September 30, 1998, net sales decreased
5.6 percent to $9,965,000 from $10,555,000 in the prior year's period,
due to an overall slowdown in its international and service sales,
while net earnings decreased 30.3 percent to $131,000 from $188,000 in
the prior year's period. Gross operating profit, as a percentage of
sales was 15.9 percent, or $1,586,000, compared to 15.1 percent, or
$1,594,000, for the same period last year. Engineering, selling and
administrative expenditures increased $8,000 to $1,325,000 up from
$1,317,000 in the third quarter of 1997. Net earnings were $131,000,
or three cents per diluted share, compared to $188,000, or four cents
per diluted share, for the comparable 1997 quarter. The Company did
not recognize any income tax expense in the quarterly periods due to
the utilization of its net operating loss carryforward.
For the nine months ended September 30, 1998, net sales decreased 2.3
percent to $31,931,000 from $32,674,000 in the prior year's period,
while net earnings increased 11.7 percent to $832,000 from $745,000 in
the prior year's period. Gross operating profit, as a percentage of
sales, increased to 16.4 percent, or $5,230,000, compared to 15.9
percent, or $5,210,000, for the same period last year. The 1997
results included a one-time royalty adjustment of $112,000 or 3 cents
per share. Engineering, selling and administrative expenditures
decreased $215,000 to $4,032,000 down from $4,247,000 in the 1997
period as the Company continues to focus on appropriate cost
reductions. Net earnings were $832,000, or 19 cents per diluted
share, compared to $745,000, or 18 cents per diluted share, for the
comparable 1997 period. The Company did not recognize any income tax
expense during the six month periods due to the utilization of its net
operating loss carryforward.
Liquidity and Capital Resources
As of September 30, 1998, cash and cash equivalents decreased $75,000
from year end 1997. On a daily basis, the Company utilizes a sweep
account to minimize its cash on hand which reduces its outstanding
balance on its line of credit and its interest expense. Accounts
receivable increased $617,000 to $5,849,000 from $5,232,000 due to
higher sales during the last month of the 1998 third quarter.
Receivable days were averaging 47 days, down from 52 at the end of
1997. Inventory increased $284,000 to $9,540,000 from $9,256,000 at
year end 1997 as the Company added the new coin division inventory
from its acquisition which took place in the second quarter of 1998.
Inventory turns were 3.7 compared to 3.9 at year-end 1997. The
Company's backlog was approximately 45,000 monitors representing
approximately four months sales. It is the Company's experience that
approximately 90 percent of backlog results in revenue recognition.
During the second quarter of 1998, the Company acquired certain assets
of the mechanical coin door division of Coin Controls Incorporated.
This acquisition led to the Company recording additional inventory,
equipment, tooling and intangible assets of $3,350,000.
<PAGE>
As of June 30, 1998, accrued expenses increased $107,000 to $989,000
from $882,000 at year end 1997. Long-term liabilities increased
$2,603,000 to $4,403,000 compared to $1,800,000 at December 31, 1997.
This increase was attributed to funding of the coin door acquisition
which was consummated during the second quarter of 1998. Working
capital increased by $708,000 since year-end 1997, to $11,623,000,
shareholders' equity improved to $2.94 per share and corporate
liquidity continues to be strong as evidenced by a current ratio of
3.68 to 1.
Year 2000 Disclosure
The Company has taken actions to understand the nature and extent of
the work required to make its' systems, products and infrastructure
Year 2000 compliant. The Company does not believe that any material
Year 2000 issues exist within its product offerings. To the extent
necessary to address material Year 2000 issues, the Company plans to
obtain current releases or upgrades from software vendors by the end
of the first quarter, 1999. The Company continues to evaluate the
estimated costs associated with this work as actual information
becomes available. Based on available information, the Company
believes that it will be able to manage its total Year 2000 transition
without any material adverse effect on its business operations,
products, operating results or financial condition.
The Company has not fully determined the extent to which its customers
and vendors systems may not be compliant. There can be no assurance
that the systems of other companies which the Company deals with will
be timely converted or that such failure to convert by another company
could not have an adverse effect on the Company's financial position,
results of operations or cash flows.
Forward Looking Statements
Because the Company wants to provide shareholders and potential
investors with more meaningful and useful information, this report may
contain certain forward-looking statements (as such term is defined in
the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended) that reflect the Company's current
expectations regarding the future results of operations, performance
and achievements of the Company. Such forward-looking statements are
subject to the safe harbor created by the Private Securities
Litigation Reform Act of 1995. The Company has tried, wherever
possible, to identify these forward-looking statements by using words
such as "anticipate," "believe," "estimate," "expect" and similar
expressions. These statements reflect the Company's current beliefs
and are based on information currently available to it. Accordingly,
these statements are subject to certain risks, uncertainties and
assumptions which could cause the Company's future results,
performance or achievements to differ materially from those expressed
in, or implied by, any of these statements which are more fully
described in our Securities and Exchange Commission filings. The
Company undertakes no obligation to release publicly the results of
any revisions to any such forward-looking statements that may be made
to reflect events or circumstances after the date of this Report or to
reflect the occurrence of unanticipated events.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits:
Exhibit 27 - Financial Data Schedule
(b). Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
WELLS-GARDNER ELECTRONICS CORPORATION
Date: November 12, 1998 By: /s/ GEORGE B. TOMA
George B. Toma CPA, CMA
Vice President of Finance,
Chief Financial Officer and Treasurer
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