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 March 31, 1999
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 May 13, 1999, 4,514,227 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 March 31, 1999
PART I - FINANCIAL INFORMATION
Item 1.
Index to Financial Statements:
Condensed Statements of Operations
- Three Months Ended March 31, 1999 & 1998
Condensed Balance Sheets
- March 31, 1999 & December 31, 1998
Condensed Statements of Cash Flows
- Three Months Ended March 31, 1999 & 1998
Notes to the Condensed Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
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 Operations
Three Months Ended March 31,
1999 1998
<S> <C> <C>
Net sales $ 9,207,000 $ 8,983,000
Cost of sales 7,934,000 7,543,000
Engineering, selling & administrative
expenses 1,401,000 1,216,000
Other expense, net 117,000 70,000
Total costs 9,452,000 8,829,000
Earnings (loss) before income taxes (245,000) 154,000
Income taxes --- ---
Net earnings (loss) $ (245,000) $ 154,000
Earnings (loss) per share:
Basic net earnings (loss) per share $ (0.05) $ 0.03
Diluted net earnings (loss) per share $ (0.05) $ 0.03
Basic average common shares outstanding * 4,503,472 4,436,812
Diluted average common shares outstanding N/A 4,722,915
See accompanying notes to the unaudited condensed financial statements.
* Shares outstanding have been adjusted to reflect the 5% stock
dividend declared on March 16, 1999.
</TABLE>
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<TABLE>
WELLS-GARDNER ELECTRONICS CORPORATION
Condensed Balance Sheets
March 31, December 31,
1999 1998
<S> <C> <C> <C> <C>
Assets:
Current assets:
Cash & cash equivalents $ 803,000 $ 26,000
Accounts receivable (net) 5,771,000 5,149,000
Note receivable 238,000 233,000
Inventory:
Raw materials 5,325,000 6,225,000
Work in progress 1,826,000 440,000
Finished goods 1,939,000 1,914,000
9,090,000 8,579,000
Prepaids & other current assets 422,000 428,000
Total current assets 16,324,000 14,415,000
Property, plant & equipment, net 2,611,000 2,649,000
Other assets:
Long-term note receivable 194,000 255,000
Intangible assets (net) 2,308,000 2,352,000
Total other assets 2,502,000 2,607,000
Total assets $ 21,437,000 $ 19,671,000
Liabilities:
Current liabilities:
Accounts payable $ 3,141,000 $ 2,548,000
Accrued expenses 809,000 1,053,000
Note payable 670,000 614,000
Total current liabilities 4,620,000 4,215,000
Long-term liabilities:
Notes payable 4,318,000 2,736,000
Total liabilities 8,938,000 6,951,000
Shareholders' Equity:
Common stock-authorized 25,000,000
shares, $1.00 par value; 4,509,322
shares issued as of March 31, 1999
& 4,500,641 shares issued as of
December 31, 1998 4,509,000 4,501,000
Additional paid in capital 1,945,000 1,929,000
Retained earnings 6,045,000 6,290,000
Total shareholders' equity 12,499,000 12,720,000
Total liabilities & shareholders' equity $ 21,437,000 $ 19,671,000
See accompanying notes to the unaudited condensed financial statements.
</TABLE>
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<TABLE>
WELLS-GARDNER ELECTRONICS CORPORATION
Condensed Statements of Cash Flows
Three Months Ended March 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (245,000) $ 154,000
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 157,000 85,000
Amortization of unearned compensation --- 18,000
Changes in current assets & liabilities
(net of effect of acquistion):
Accounts receivable (622,000) (662,000)
Note receivable (6,000) 161,000
Inventory (510,000) (616,000)
Prepaid expenses & other current assets 5,000 (124,000)
Accounts payable 593,000 (305,000)
Accrued expenses (244,000) (307,000)
Net cash used in operating activities (872,000) (1,596,000)
Cash used in investing activities:
Note receivable 61,000 (432,000)
Additions to property, plant & equipment, net (75,000) (22,000)
Net cash used in investing activities (14,000) (454,000)
Cash provided by financing activities:
Borrowings - note payable 1,638,000 1,875,000
Proceeds from stock purchase plan 7,000 ---
Proceeds from stock options exercised 18,000 64,000
Net cash provided by financing activities 1,663,000 1,939,000
Net increase in cash & cash equivalents 777,000 (111,000)
Cash & cash equivalents at beginning of period 26,000 150,000
Cash & cash equivalents at end of period 803,000 39,000
Supplemental cash flow disclosure:
Interest paid $ 81,000 $ 76,000
Taxes paid $ --- $ 10,000
See accompanying notes to the unaudited condensed financial statements.
</TABLE>
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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 adjustments, which are necessary for a fair presentation of
the financial position and results of operations 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 1998 Annual Report to shareholders. The
results of operations for the first quarter ended March 31, 1999 are
not necessarily indicative of the operating results for the full year.
2. On March 16, 1999, the Company declared a five percent (5%) stock
dividend payable to all common stock shareholders of record on April
13, 1999. Shares outstanding for all periods presented have been
adjusted to reflect the five percent (5%) stock dividend.
3. Basic earnings per share is based on the weighted average number of
shares outstanding whereas diluted earnings per share in 1998 includes
the dilutive effect of unexercised common stock equivalents. Both
basic and diluted earnings per share reflect the declared stock
dividend as referenced in note 2.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
First Quarter Ended March 31, 1999 and 1998
For the first quarter ended March 31, 1999, net sales increased 2.5
percent to $9,207,000 from $8,983,000 in the prior year's period.
Included in the 1999 results are sales of approximately $700,000
relating to coin doors, a product line which was acquired in June,
1998. Gross operating margin, as a percentage of sales was 13.8
percent, or $1,273,000, compared to 16.0 percent, or $1,440,000, for
the same period last year. The decrease in gross operating margin is
attributed to lower sales in the Company's service business, lower
first quarter production which caused weak overhead absorption and an
overall increase in the Company's inventory reserve. Engineering,
selling and administrative expenditures increased $185,000 to
$1,401,000 from $1,216,000 in the first quarter of 1998. The increase
is attributed to additional costs associated with new market and
product development, investments in Y2K compliance, e-commerce and
information systems upgrades and various separation costs. The
Company reported a net loss of $245,000, or five cents per basic and
diluted share, compared to net earnings of $154,000, or three cents
per basic and diluted share, for the comparable 1998 quarter. The
Company did not recognize any income tax expense in the quarterly
periods due to the utilization of its net operating loss carryforward.
Liquidity and Capital Resources
As of March 31, 1999, cash and cash equivalents increased $777,000
from year end 1997. This increase was due to a timing difference
caused by a deposit in transit. 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 $622,000 to $5,771,000 from
$5,149,000 due to higher sales during the last month of the 1999
quarter. Receivable days were averaging 45 days, comparable to 44 at
the end of 1998. Inventory increased $511,000 to $9,090,000 from
$8,579,000 at year end 1998 as the Company procured additional
material for its second quarter production. Inventory turns were 3.5
compared to 4.2 at year-end 1998. At the end of the first quarter,
1999, the Company's backlog was up 44 percent from the end of 1998.
It is the Company's experience that approximately 90 percent of
backlog results in revenue recognition. Accounts payable increased
$593,000 to $3,141,000 from $2,548,000 at year end 1998. The increase
is attributed to additional purchases made during the last month of
the 1999 quarter. Long-term liabilities increased $1,582,000 to
$4,318,000 compared to $2,736,000 at December 31, 1998. This increase
was attributed to the note payable carried by the Company to fund
operations. Working capital increased by $1,504,000 since year-end
1998, to $11,704,000, shareholders' equity was $2.77 per share and
corporate liquidity continues to be strong as evidenced by a current
ratio of 3.53 to 1.
<PAGE>
Year 2000 Disclosure
The term Y2K is used to refer to a worldwide computer-related problem
where software programs and embedded programs in microprocessors will
not work properly when processing a date greater than December 31,
1999. This problem results from using two digits to denote the third
and fourth digit of a four-digit year whereas a program assumes 19 to
be the first two digits. Many existing programs will continue to
assume the 19 as the first and second digit while a 20 or greater is
required. A method of fixing the problem is for all years to be
denoted in a four-digit field and the programs to recognize all four
digits as the year. This Y2K problem has resulted in significant
worldwide concern about the future operations of businesses and other
institutions.
The majority of the systems utilized by the Company have already been
made Y2K compliant in an undertaking which began in 1997. The balance
of the Company's systems are planned to be compliant by the second
quarter of 1999. Management believes that there are no Y2K issues
with respect to the functionality of any products sold in the past or
expected to be sold in the future. The unknown area of Y2K related
exposure is with the Company's suppliers. Although management has
began a program of supplier inquiry and evaluation to assess the
potential problem, management cannot make a determination as to the
suppliers' level of Y2K compliance at this time. 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. Currently, no
material compliance costs are expected to be incurred and management
expects to make contingency plans as necessary.
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>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's market risk
during the three month period ended March 31, 1999. For additional
information refer to Item 7 in the Company's Annual Report in form 10-
K for the year ended December 31, 1998.
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 March 31, 1999.
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: May 13, 1999 By: /s/ GEORGE B. TOMA
George B. Toma CPA, CMA
Vice President of Finance, Chief
Financial Officer and Treasurer
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