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, 2000
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 31, 2000, 4,886,295 shares of the Common Stock, $1.00 par
value of the registrant were outstanding.
<PAGE>
WELLS-GARDNER ELECTRONICS CORPORATION
FORM 10-Q
For The Quarter Ended September 30, 2000
PART I - FINANCIAL INFORMATION
Item 1.
Index to Financial Statements:
Condensed Consolidated Statements of Earnings
- Three Months Ended September 30, 2000 & 1999
- Nine Months Ended September 30, 2000 & 1999
Condensed Consolidated Balance Sheets
- September 30, 2000 & December 31, 1999
Condensed Consolidated Statements of Cash Flows
- Nine Months Ended September 30, 2000 & 1999
Notes to the Condensed Consolidated 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
<PAGE>
Item 1. Financial Statements
<TABLE>
WELLS-GARDNER ELECTRONICS CORPORATION
Condensed Consolidated Statements of Earnings (unaudited)
Three Months Ended September 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net sales $ 10,796,000 $ 9,086,000
Cost of sales 8,105,000 7,624,000
Engineering, selling & administrative expenses 2,263,000 1,303,000
----------- -----------
Operating income 428,000 159,000
(Gain) on sale of fixed assets (1,000) -
Other expense, net 197,000 128,000
Income taxes - -
----------- -----------
Net earnings $ 232,000 $ 31,000
=========== ===========
Earnings per share:
Basic net earnings per share $ 0.05 $ 0.01
=========== ===========
Diluted net earnings per share $ 0.05 $ 0.01
=========== ===========
Basic average common shares outstanding* 4,886,295 4,748,108
Diluted average common shares outstanding 4,930,101 4,850,701
See accompanying notes to the unaudited condensed
consolidated financial statements.
* Shares outstanding have been adjusted to reflect the 5% stock dividend
paid to all shareholders of record as of April 7, 2000.
</TABLE>
<PAGE>
<TABLE>
WELLS-GARDNER ELECTRONICS CORPORATION
Condensed Consolidated Statements of Earnings (unaudited)
Nine Months Ended September 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net sales $ 37,704,000 $ 29,327,000
Cost of sales 30,033,000 24,707,000
Engineering, selling & administrative expenses 6,504,000 4,093,000
----------- -----------
Operating income 1,167,000 527,000
(Gain) on sale of fixed assets (329,000) -
Other expense, net 534,000 337,000
Income taxes - -
----------- -----------
Net earnings $ 962,000 $ 190,000
=========== ===========
Earnings per share:
Basic net earnings per share $ 0.20 $ 0.04
=========== ===========
Diluted net earnings per share $ 0.19 $ 0.04
=========== ===========
Basic average common shares outstanding* 4,904,739 4,738,503
Diluted average common shares outstanding 5,022,591 4,788,142
See accompanying notes to the unaudited condensed
consolidated financial statements.
* Shares outstanding have been adjusted to reflect the 5% stock dividend paid
to all shareholders of record as of April 7, 2000.
</TABLE>
<PAGE>
<TABLE>
WELLS-GARDNER ELECTRONICS CORPORATION
Condensed Consolidated Balance Sheets (unaudited)
September 30, December 31,
2000 1999
----------- -----------
<S> <C> <C> <C> <C>
Assets:
Current assets:
Cash & cash equivalents $ 476,000 $ 119,000
Accounts receivable (net) 6,763,000 4,795,000
Inventory:
Raw materials 5,689,000 6,123,000
Work in progress 2,675,000 402,000
Finished goods 5,506,000 1,985,000
--------- ---------
13,870,000 8,510,000
Other current assets 1,859,000 609,000
----------- -----------
Total current assets 22,968,000 14,033,000
Property, plant & equipment (net) 1,103,000 2,567,000
Other assets:
Investment in joint venture 206,000 -
Intangibles (net) 2,701,000 2,189,000
----------- -----------
Total other assets 2,907,000 2,189,000
Total assets $ 26,978,000 $ 18,789,000
=========== ===========
Liabilities:
Current liabilities:
Accounts payable $ 6,425,000 $ 2,127,000
Accrued expenses 574,000 755,000
Note payable 670,000 670,000
----------- -----------
Total current liabilities 7,669,000 3,552,000
Long-term liabilities:
Notes payable 6,523,000 3,576,000
----------- -----------
Total liabilities 14,192,000 7,128,000
Shareholders' Equity:
Common stock: authorized 25,000,000 shares
$1.00 par value; 4,886,295 shares issued
as of September 30, 2000 & 4,543,570
shares issued as of December 31, 1999 4,886,000 4,544,000
Additional paid in capital 2,750,000 1,869,000
Retained earnings 5,324,000 5,248,000
Unearned compensation (174,000) -
----------- -----------
Total shareholders' equity 12,786,000 11,661,000
----------- -----------
Total liabilities & shareholders' equity $ 26,978,000 $ 18,789,000
=========== ===========
See accompanying notes to the unaudited condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
WELLS-GARDNER ELECTRONICS CORPORATION
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 962,000 $ 190,000
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation & amortization 442,000 472,000
Amortization of unearned compensation 6,000 -
Gain on sale of fixed assets (329,000) -
Share of loss in joint venture 54,000 -
Changes in current assets & liabilities
(net of effects of acquisition):
Accounts receivable (1,213,000) 135,000
Note receivable - (18,000)
Inventory (4,517,000) (2,626,000)
Prepaid expenses & other current assets (1,245,000) 212,000
Accounts payable 3,955,000 (230,000)
Accrued expenses (288,000) (736,000)
---------- ----------
Net cash used in operating activities (2,173,000) (2,601,000)
---------- ----------
Cash provided by (used in) investing activities:
Issuance of note receivable - 190,000
Payment for acquisition, net of cash acquired (1,915,000) -
Proceeds from sale of fixed assets 1,499,000 -
Additions to plant & equipment (158,000) (266,000)
---------- ----------
Net cash used in investing activities (574,000) (76,000)
---------- ----------
Cash provided by financing activities:
Borrowings - note payable 2,947,000 2,653,000
Proceeds from stock options exercised
& employee stock purchase plan 157,000 93,000
---------- ----------
Net cash provided by financing activities 3,104,000 2,746,000
---------- ----------
Net increase in cash & cash equivalents 357,000 69,000
Cash & cash equivalents at beginning of period 119,000 26,000
---------- ----------
Cash & cash equivalents at end of period $ 476,000 $ 95,000
---------- ----------
Supplemental cash flow disclosure:
Interest paid $ 468,000 $ 281,000
Taxes paid $ - $ -
Supplemental schedule of noncash
investing activities:
Investment in joint venture $ 265,000 $ -
See accompanying notes to the unaudited condensed
consolidated financial statements.
</TABLE>
<PAGE>
WELLS-GARDNER ELECTRONICS CORPORATION
Notes to the Condensed Consolidated Financial Statements
1. In the opinion of management, the accompanying unaudited condensed
consolidated 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
consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's
1999 Annual Report to shareholders. The results of operations for the
three months and nine months ended September 30, 2000 are not necessarily
indicative of the operating results for the full year.
2. On January 12, 2000, the Company acquired certain assets and
liabilities of American Gaming and Electronics (AG&E), a leading service
and parts distributor to the gaming markets. This acquisition was
accounted for under the purchase method of accounting and accordingly, the
results of operations of AG&E have been included in the Company's
consolidated financial statements from January 12, 2000. The excess of
the purchase price over the fair value of the net identifiable assets
acquired has been recorded as goodwill and is being amortized over 20
years. The purchase agreement provides for additional payments over the
next four years contingent on achieving certain operating income targets.
The additional payments, if any, will be charged to goodwill at the time
incurred. The effect on results of operations had the acquisition
occurred at the beginning of the year was insignificant.
3. On February 17, 2000, the Company declared a five percent (5%) stock
dividend payable to all common stock shareholders of record on April 7,
2000. Shares outstanding for all periods presented have been adjusted to
reflect the five percent (5%) stock dividend.
4. 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. Both basic and
diluted earnings per share reflect the declared stock dividend as
referenced in note 3.
5. On March 28, 2000, the Company sold its Chicago headquarters and
recognized a gain on the sale of fixed assets of $328,000 which was
recorded in the first quarter of 2000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Third Quarter Ended September 30, 2000 and 1999
For the third quarter ended September 30, 2000, net sales increased 18.8
percent to $10,796,000 from $9,086,000 in the prior year's period. The
sales increase in the quarter was attributed to additional revenue from
the Company's acquisition of American Gaming and Electronics which was
consummated in January, 2000. Gross operating margin, as a percentage of
sales, was 24.9 percent, or $2,691,000, compared to 16.1 percent, or
$1,462,000, for the same period last year. This increase in gross
operating margin is attributed to the higher sales volume and favorable
strategic inventory purchases during the quarter. Engineering, selling,
administrative and amortization expenditures increased $960,000 to
$2,263,000 from $1,303,000 in the third quarter of 1999. This increase is
attributed to the operating expenses incurred for American Gaming and
Electronics and the Company's ongoing efforts to expand its international
sales. Other expense, net increased $69,000 to $197,000 from $128,000 in
the third quarter of 1999. This increase is mainly attributed to
additional interest expense incurred during the quarter. For the third
quarter of 2000, the Company reported net earnings of $232,000, or 5 cents
per basic and diluted share, compared to net earnings of $31,000, or 1
cent per basic and diluted share, for the comparable 1999 quarter. The
Company did not recognize any income tax expense in the quarterly periods
due to the utilization of net operating loss carryforwards.
Nine Months Ended September 30, 2000 and 1999
For the nine months ended September 30, 2000, net sales increased 28.6
percent to $37,704,000 from $29,327,000 in the prior year's period. The
sales increase was attributed to additional revenue from the Company's
acquisition of American Gaming and Electronics and additional sales from
the Company's service business. Gross operating margin, as a percentage
of sales, was 20.3 percent, or $7,671,000, compared to 15.8 percent, or
$4,620,000, for the same period last year. This increase in gross
operating margin is attributed to the higher sales volume, strategic
inventory purchases and a favorable product mix. Engineering, selling,
administrative and amortization expenditures increased $2,411,000 to
$6,504,000 from $4,093,000 for the same period last year. This increase
is attributed to the operating expenses incurred for American Gaming and
Electronics and the Company's international sales efforts. During the
first quarter of 2000, the Company sold its headquarters and recognized a
gain on sale of fixed assets of $328,000. Other expense, net increased
$197,000 to $534,000 from $337,000 in 1999. This increase is mainly
attributed to additional interest expense to fund the acquisition of
American Gaming and Electronics and operations during the year. For the
nine months of 2000, the Company reported net earnings of $962,000, or 20
cents per basic shares and 19 cents per diluted share, compared to net
earnings of $190,000, or 4 cents per basic and diluted share, for the
comparable 1999 period. The Company did not recognize any income tax
expense in the nine month periods due to the utilization of net operating
loss carryforwards.
<PAGE>
Liquidity and Capital Resources
As of September 30, 2000, cash and cash equivalents increased $357,000
from year end 1999. This increase was due to a timing difference caused by
deposits in transit. On a daily basis, the Company utilizes a sweep
account to reduce its cash on hand to minimize its outstanding balance on
its revolving line of credit and its interest expense. During the quarter
the Company entered into a new long-term banking agreement which is filed
as an exhibit to this document. Accounts receivable increased $1,968,000
to $6,763,000 from $4,795,000. This increase is attributed to the
significant percentage increase in sales volume in 2000. Inventory
increased $5,360,000 to $13,870,000 from $8,510,000 at year end 1999.
This increase is attributed to the inventory on hand of American Gaming
and Electronics and higher raw materials and finished goods in the
Company's core business. Other current assets increased $1,250,000 to
$1,859,000 from $609,000 at year end 1999. This increase is attributed to
higher deposits on hand with the Company's strategic vendors. During the
first quarter of 2000, the Company entered into a 50/50 joint
manufacturing venture in Malaysia. This joint venture is accounted for
under the equity method. The Company recorded an investment of $265,000
and recorded a net loss on operations of $54,000 during 2000. Intangibles
(net) increased $512,000 to $2,701,000 from $2,189,000 at year end 1999,
as the Company recorded goodwill and a noncompete agreement on its
acquisition of American Gaming and Electronics. Current liabilities
increased $4,117,000 to $7,669,000 from $3,552,000 at year end 1999. This
increase is attributed to additional accounts payable due to vendors based
on the additional purchases during the quarter. Long-term liabilities
increased $2,947,000 to $6,523,000 compared to $3,576,000 at December 31,
1999. This increase is attributed to a higher outstanding balance at
September 30, 2000 of the Company's general line of credit to fund the
growth of current and new operations. Working capital increased by
$4,818,000 since year-end 1999, to $15,299,000 and the Company's current
ratio is 3.0 to 1.
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 and nine month periods ended September 30, 2000. For additional
information refer to Item 7 in the Company's Annual Report in form 10-K
for the year ended December 31, 1999.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits:
Exhibit 10.1 - Amended and Restated Loan Agreement dated
September 1, 2000
Exhibit 10.2 - Revolving Note dated September 1, 2000
Exhibit 10.3 - Amended and Restated London Interbank Offered Rate
Borrowing Agreement dated September 1, 2000
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, 2000.
<PAGE>
SIGNATURE
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: October 31, 2000 By: /s/ GEORGE B. TOMA
-------------------------------------
George B. Toma CPA, CMA
Vice President of Finance,
Chief Financial Officer & Corporate
Secretary
