UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
---------
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the fiscal year ended December 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period from ____________ to _________
Commission File No. 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
incorporation or organization) Identification Number)
2701 North Kildare Avenue, Chicago, Illinois 60639
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 773/252-8220
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1.00 par value American Stock Exchange
----------------------------- -----------------------
Title of each class Name of each exchange on which
registered
Securities registered pursuant to Section 12(g) of the Act: None
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of March 1, 2000, 4,562,742 shares of the Common Stock of the
registrant were outstanding.
<PAGE>
While it is difficult to determine the number of shares of stock owned
by non affiliates, the registrant estimates that the aggregate market
value of the registrant's Common Stock held by non affiliates on March
1, 2000 was approximately $10,872,000. This determination is based
upon an estimate that 70.6% of the shares are so owned by non
affiliates and upon the closing price for the Common Stock on the
American Stock Exchange on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Part
Portions of Annual Report to Shareholders for fiscal year ----
ended December 31, 1999: I & II
Portions of Proxy Statement for Annual Meeting of
Shareholders to be held on April 25, 2000: III
<PAGE>
PART I
Item 1. BUSINESS
(a) General Development of Business
Wells-Gardner Electronics CorporationO (the "Company") is a
distributor and ISO 9001 certified manufacturer of color video
monitors, video liquid crystal & plasma displays, coin doors, coin
mechanisms and other related distribution products for a wide variety
of markets including, but not limited to, gaming machines, coin-
operated video games, leisure and fitness, automotive, display,
intranet, medical, service and video walls. The Company continues to
focus on improving the quality of its products to achieve its goal of
being the "best-in-class" quality supplier in all its served markets.
During 1999, the Company passed its annual quality audit conducted by
the ISO 9001 accreditation agency. The Company was incorporated in
Illinois in 1925.
(b) Narrative Description of Business
(c) (i), (ii) and (iii)
PRODUCTS
The Company's primary business is the distribution, design,
manufacture, assembly and marketing of electronic components which
consist of video color monitors and displays, gaming supplies and
components, coin doors and mechanisms and the bonding of touch sensors
to video monitors. The image on a CRT display is produced by
magnetically guiding an interruptible stream of electrons against the
back of a phosphorescent screen. This stream of electrons scans a
series of horizontal lines from the top to the bottom of the screen.
When the stream of electrons strikes the back of the screen a bright
area is produced and when it is interrupted, a dark area appears. In a
medium-resolution unit, the stream of electrons scans the screen in a
series of 525 horizontal lines 30 times per second, whereas the series
of light and dark areas produced appears as a steady coherent image to
the viewer. High-resolution displays scan a greater number of lines at
a greater speed, thus producing a clearer image on the screen. Video
products and accessories accounted for approximately 99 percent of
revenues in 1999, 1998 and 1997.
<PAGE>
The Company offers a full line of video monitors, with CRT sizes
ranging from 13" to 39" with horizontal scan frequencies from 15kHz to
35kHz. In addition to providing standardized products, the Company
also customizes electrical and mechanical applications to meet specific
customer requirements and optically bonds touch screen sensors to the
face of the monitors to allow the user of a CRT video monitor to
interact with a computer program by touching a video screen. The
Company has also entered the gaming distribution market as it has
acquired certain assets of American Gaming & Electronics of New Jersey,
Las Vegas and Florida in January, 2000.
The Company's sales are comprised of five main applications:
1999 1998 1997
------------------------
Amusement 30% 38% 44%
Gaming 29% 22% 20%
Service & Coin 29% 20% 15%
Leisure / Fitness 6% 9% 12%
Display / Other 6% 11% 9%
------------------------
Totals 100% 100% 100%
========================
MANUFACTURING AND ASSEMBLY
The Company's production activities consist primarily of wiring printed
circuit boards, assembling finished units (and to a limited extent
subassemblies), aligning, testing and optically bonding touch sensors.
The Company manufactures a limited range of electronic components and
coin doors and mechanisms and therefore relies on outside sources for
the majority of the other required components. A limited number of
sources are available for such electronic components and the other raw
materials. Two sources supply the Company with almost all of the
chassis subassemblies for its two-dimensional color game monitors.
Chassis subassemblies are contracted off-shore based on custom designs
developed by the Company. As the Company believes is characteristic of
other manufacturers in its industry, it has been confronted with long
lead times and cost pressures.
MARKETING AND SALES
The Company sells products throughout the world. The Company's
products are sold primarily through James Industries, Inc., a sales
representative organization. This representation is currently
furnished under a Sales Representation Agreement (See Item 13. Certain
Relationships and Related Transactions). James Industries, Inc. is
headquartered in Inverness, Illinois and also utilizes the services of
regional sub-representative firms. The Company maintains its own
internal sales staff primarily for sales of products not covered under
the Sales Representation Agreement, repair and service of its products
and to support its external sales representative organization.
<PAGE>
(c) (iv) The Company is licensed on a non-exclusive basis
under certain patents owned by RCA Corporation, covering the technical
and electrical design of color display and video monitor chassis. Fees
under these licenses are based on the number of units shipped and
amounted to less than 0.2% of total 1999 revenue. Although certain of
these licenses may expire in the future, it has been the practice of
the Company to renew such licenses on substantially the same terms.
However, failure of the Company to obtain renewal of any of these
licenses could have a materially adverse effect on the Company's
business, financial condition and results of operations.
(c) (v) The Company's business is generally not seasonal.
(c) (vi) The Company has no unique or unusual practices
relating to working capital items.
(c) (vii) The Company's largest customer accounted for total
revenues of 32%, 33% and 34% in 1999, 1998 and 1997, respectively.
(c) (viii) The Company's 1999 year-end backlog was
approximately 30,000 monitors representing approximately three months
sales. It is the Company's experience that well over 90 percent of
backlog results in revenue recognition.
(c) (ix) No material portion of the Company's business is
subject to re-negotiation of profits or termination of contracts or
subcontracts at the election of the Government.
(c) (x) The Company encounters intense competition from many
domestic and foreign manufacturers. Due to the nature of its business
and the absence of reliable industry statistics, the Company cannot
estimate its position in relation to its competitors. However, the
Company recognizes that some competitors have greater financial and
personnel resources, handle more extensive lines of products, operate
larger facilities and price some products more competitively than the
Company. Although the Company believes that the prices of its products
are competitive, it endeavors to meet competition primarily through the
quality of its product line, service and delivery reliability and new
product innovations.
(c) (xi) During 1999, the Company spent approximately
$1,334,000 for product engineering, research and development costs,
compared to $1,536,000 in 1998 and $1,786,000 in 1997.
(c) (xii) Compliance with federal, state and local provisions
which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection
of the environment, has no material effect upon the capital
expenditures, earnings and competitive position of the Company.
(c) (xiii) At December 31, 1999, the Company employed
approximately 170 persons. The Company believes its relationship with
its employees is satisfactory.
(d) Export sales were approximately 25 percent of sales in
1999, 21 percent in 1998 and 22 percent in 1997.
<PAGE>
Item 2. PROPERTIES
The Company's plant, which is owned by the Company, is located at 2701
North Kildare Avenue in Chicago, Illinois. It has approximately
207,000 square feet of floor space. Not less than 100,000 of the
207,000 square feet of the plant are at any time dedicated to
production. Offices for engineering, sales and administration are also
located at that facility. The plant is in good condition, is well
maintained, and currently has excess production capacity. In 1999, the
plant operated at an average 62 percent capacity based on one shift
production. The plant is not subject to any material encumbrance.
Item 3. LEGAL PROCEEDINGS
As the Company sells its products and services to a wide customer base,
from time to time it may be named in legal proceedings. The Company
aggressively reviews all claims on a timely basis and in the opinion of
management and its legal counsel, any currently pending legal claims
have no basis and no loss contingency reserves have been established.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
Year First
Elected As An
Name Office Age Executive Officer
---- ------ --- -----------------
Anthony Spier Chairman of the Board, President
and Chief Executive Officer 56 1994
Kathleen E. Hoppe Director of Information Technology 54 1994
Mark E. Komorowski Vice President of Sales 34 1994
Larry Mahl Director of Materials 52 1989
John S. Pircon Vice President of Marketing 41 1994
Eric Slagh Director of Quality 34 1997
Jeff Sterling Vice President of Engineering 41 1998
George B. Toma Vice President of Finance,
Chief Financial Officer, Treasurer
And Corporate Secretary 32 1996
Randall S. Wells Executive Vice President and
General Manager 48 1980
<PAGE>
Unless otherwise indicated, each executive officer has served in
various executive capacities with the Company for the past five years.
George B. Toma joined the Company in 1990 and was elected Vice
President of Finance, Chief Financial Officer and Treasurer in
February, 1997. Mr. Toma was previously elected Chief Financial
Officer and Treasurer in April, 1996 and prior thereto held various
accounting positions within the Company. Prior to joining the Company,
Mr. Toma was an auditor with Laventhol & Horwath. Mr. Toma is a
certified public accountant as well as a certified management
accountant.
Mark E. Komorowski joined the Company in 1990 and was elected as Vice
President in April, 1996. Prior to this election, Mr. Komorowski held
the position of Controller. Prior to joining the Company, Mr.
Komorowski was an auditor with Laventhol & Horwath.
Eric Slagh joined the Company as Director of Quality in May, 1997.
Prior to joining the Company, Mr. Slagh was Quality Assurance Manager
at Danfoss Electronic Drives.
Jeff Sterling joined the Company as Vice President of Engineering in
November, 1998. Prior to joining the Company, Mr. Sterling was
Development Director of Commercial Products at Zenith Electronics.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDERS MATTERS.
The information required by this Item is set forth in Exhibit 13 under
the caption "Common Share Market Price," which information is contained
in the Company's Annual Report to Shareholders for the year ended
December 31, 1999, and which information is hereby incorporated herein
by reference.
Item 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in Exhibit 13 under
the caption "Selected Financial Data," which information is contained
in the Company's Annual Report to Shareholders for the year ended
December 31, 1999, and which information is hereby incorporated herein
by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this Item is set forth in Exhibit 13 under
the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" which information is contained in
the Company's Annual Report to Shareholders for the year ended December
31, 1999, and which information is hereby incorporated herein by refer-
ence.
<PAGE>
a. Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item is set forth in Exhibit 13 under
the caption "Market and Credit Risks" in the Management's Discussion
and Analysis of Financial Condition and Results of Operations which
information is contained in the Company's Annual Report to Shareholders
for the year ended December 31, 1999, and which information is hereby
incorporated herein by reference.
Because the Company wants to provide shareholders and potential
investors with more meaningful and useful information, this Report
contains 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. 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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements together with the notes thereto are
set forth in Exhibit 13, which information is contained in the
Company's Annual Report to Shareholders for the year ended December 31,
1999 and which information hereby incorporated herein by reference.
Balance Sheets as of December 31, 1999 and 1998
Statements of Operations for years ended December 31, 1999, 1998 and
1997
Statements of Shareholders' Equity for years ended December 31, 1999,
1998 and 1997
Statements of Cash Flows for years ended December 31, 1999, 1998 and
1997
Notes to Financial Statements
Independent Auditors' Report
Quarterly financial data for the years ended December 31, 1999 and 1998
are set forth in Exhibit 13 in Note 13 of "Notes to Financial
Statements" and are contained in the Company's Annual Report to
Shareholders for the year ended December 31, 1999, which information is
hereby incorporated herein by reference.
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
a. Directors
The information required by this Item is set forth in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held on
April 25, 2000, under the captions "Election of Directors" and
"Compliance with Section 16(a) of the Exchange Act," which information
is hereby incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held on
April 25, 2000, under the captions "Summary Compensation Table,"
"Option Grants in 1999," "Aggregated Option Exercises in 1999 and
Option Values at December 31, 1999," "Report of Board of Directors on
Compensation," and "Compensation Committee Interlocks and Insider
Participation," which information is hereby incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is set forth in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held on
April 25, 2000, under the caption "Securities Beneficially Owned by
Principal Shareholders and Management," which information is hereby
incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Information required by this Item is set forth in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held on
April 25, 2000, under the caption "Compensation Committee Interlocks
and Insider Participation," which information is hereby incorporated
herein by reference.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
a. (1) Financial Statements The information required by this Item
is set forth in Part II, Item 8 of this Report. The Independent
Auditors Report is set forth following the Financial Statement Schedule
referred to under (2) below.
(2) Financial Statement Schedules The information required by
this Item is set forth following the signature page of this Report.
(3) Exhibits
The following exhibits are filed herewith:
3.1. Articles of Incorporation of the Company, as amended, filed as
Exhibit 3.1 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1994 and incorporated herein by reference.
3.2. By-Laws of the Company, as amended, filed as Exhibit 3.2 of the
Company's Annual Report on Form 10-K for the year ended December 31,
1994 and incorporated herein by reference.
10.1*. Amended Employment Agreement dated February 29, 1996,
between the Company and Anthony Spier and incorporated herein by
reference.
10.2. License Agreement dated January 1, 1995, between the Company
and RCA Corporation and incorporated herein by reference.
10.3. Agreement dated July 1, 1997, between the Company and Local
1031, I.B.E.W., AFL-CIO, and incorporated herein by reference.
10.4*. Wells-Gardner Electronics Corporation Employee 401K Plan
dated January 1, 1990 and Amendment 1 dated February 11, 1992, and
Amendment 2 dated January 20, 1994, filed as Exhibit 10.10 of the
Company's Annual Report on Form 10-K for the year ended December 31,
1993 and incorporated herein by reference.
10.5*. Wells-Gardner Electronics Corporation 1996 Nonemployee
Director Plan, filed as Annex A to the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held on April 23, 1996 and
incorporated herein by reference.
10.6*. Wells-Gardner Electronics Corporation Amended and Restated
Incentive Stock Plan, as amended and filed as Exhibit 4.1 of the
Company's Form S-8, dated August 21, 1998.
10.7. Credit Agreements dated June 5, 1998, between American
National Bank and Trust Company and the Company, filed as Exhibits 2.2,
2.3, 2.4 and 2.5 of the Company's Form 8K/A dated August 5, 1998 and
incorporated herein by reference.
<PAGE>
10.8. Amended and Restated Sales Representative Agreement dated
December 9, 1998 and Amendment 1 dated August 30, 1999 and incorporated
by reference in this Annual Report on Form 10-K.
10.9. Guaranty Agreement dated December 9, 1998, between James J.
Roberts Jr., John R. Blouin and the Company and incorporated by
reference in this Annual Report on Form 10-K.
10.10. Promissory Note dated December 9, 1998 and Amendment 1 dated
August 30, 1999, between James Industries, James J. Roberts Jr., John
R. Blouin and the Company and incorporated by reference in this Annual
Report on Form 10-K.
10.11. Voting Rights Agreement dated December 9, 1998 and Amendment
1 dated August 30, 1999, among the Company, Anthony Spier, John R.
Blouin, James J. Roberts, Jr. and James Industries, Inc. and
incorporated by reference in this Annual Report on Form 10-K.
13. Certain portions of the Company's Annual Report to Shareholders
for the year ended December 31, 1999 as specified in Part I and II
hereof to be incorporated by reference in this Annual Report on Form
10-K.
23. Consent of KPMG LLP.
27. Financial Data Schedule
*Management contract or compensatory plan or arrangement.
b. Reports on Form 8-K No reports on Form 8-K were filed during
the last quarter ended December 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Secu-
rities 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
By: /S/ ANTHONY SPIER
-----------------------
Anthony Spier Chairman of the Board,
President and Chief
Executive Officer February 16, 2000
/S/ GEORGE B. TOMA
-----------------------
George B. Toma CPA, CMA Vice President of Finance,
Chief Financial Officer,
Treasurer and Corporate
Secretary February 16, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ ANTHONY SPIER Chairman of the Board,
Anthony Spier President and Chief
Executive Officer February 16, 2000
/S/ JOHN R. BLOUIN
John R. Blouin Director February 16, 2000
/S/ MARSHALL L. BURMAN
Marshall L. Burman Director February 16, 2000
/S/ JERYY KALOV
Jerry Kalov Director February 16, 2000
/S/ FRANK R. MARTIN
Frank R. Martin Director February 16, 2000
/S/ JAMES J. ROBERTS, JR.
James J. Roberts, Jr. Director February 16, 2000
/S/ RANDALL S. WELLS
Randall S. Wells Director February 16, 2000
/S/ ERNEST R. WISH
Ernest R. Wish Director February 16, 2000
<PAGE>
FINANCIAL SCHEDULE
Schedules not included with this additional financial data have been
omitted because they are not applicable or the required information is
shown in the financial statements or notes thereof.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at
Beginning (1) (2) Balance at
Year of Period Additions Deductions End of Period
---- --------- --------- ---------- -------------
1997 106,933 175,000 17,633 264,300
1998 264,300 36,133 215,433 85,000
1999 85,000 36,000 61,000 60,000
(1) Provision for bad debt.
(2) Accounts receivable written off against the allowance.
EXHIBIT 13
<TABLE>
------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
Years ended December 31, (In thousands except per-share data)
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings Data:
Net sales $38,335 $42,590 $42,989 $36,668 $28,301
Earnings (loss) from operations
excluding special charges
& gain on sale of fixed assets (723) 1,505 1,124 563 (375)
Special charges - - - - (886)
Gain on sale of fixed assets - - - - 358
Net earnings (loss) $(1,190) $ 974 $ 775 $ 403 $(1,059)
------------------------------------------------------------------------------
Basic net earnings (loss)
per share $ (0.26) $ 0.22 $ 0.18 $ 0.09 $ (0.25)
Diluted net earnings (loss)
per share $ (0.26) $ 0.21 $ 0.17 $ 0.09 $ (0.25)
------------------------------------------------------------------------------
Balance Sheet Data:
Inventory $ 8,510 $ 8,579 $ 9,257 $ 7,344 $ 8,930
Working capital $10,481 $10,199 $10,915 $ 9,017 $10,213
Total assets $18,789 $19,671 $17,520 $14,125 $16,570
General debt $ 1,510 - $ 1,800 $ 1,300 $ 3,125
Acquisition debt $ 2,736 $ 3,350 - - -
Shareholders' equity $11 661 $12,720 $11,385 $10,095 $ 9,633
-----------------------------------------------------------------------------
COMMON SHARE MARKET PRICE
The Company's common shares are traded on the American Stock
Exchange under the symbol WGA. On December 31, 1999, there were
approximately 700 holders of record of the common shares. A five
percent (5%) stock dividend was paid in 1999, no dividend was paid
in 1998. High and low sales prices the the last two years were:
1999 Prices 1998 Prices
------------------------------------------------------
High Low High Low
------------------------------------------------------
Quarter ended:
March 31, 3 5/8 2 1/2 6 3/4 5 5/16
June 30, 3 1/2 2 5 1/2 3 7/8
September 30, 4 1/16 2 3/4 5 2 5/8
December 31 3 11/16 2 3/4 3 5/8 2 3/8
------------------------------------------------------
Wells-Gardner Electronics Corporation [ 1 ]
</TABLE
<PAGE>
PRESIDENT'S REPORT
TO OUR SHAREHOLDERS, CUSTOMERS, SUPPLIERS & EMPLOYEES:
1999 was a major transition year for Wells-Gardner. The Company
announced a dramatic new strategic direction designed to make Wells-
Gardner globally competitive and to increase profitability and
shareholder value.
Our New Strategic Plan
As part of this new strategy for the 21st Century, the Company is
re-engineering itself from a manufacturer of monitors primarily for the
video amusement market to a manufacturing, service and distribution
Company with nearly 60% of our sales in the rapidly growing gaming and
service markets.
This new strategy includes a shift away from being a strictly
U.S.-based manufacturer to a distribution and service Company with both
US-based and off-shore manufacturing.
During 1999 and early 2000, Wells-Gardner took the following vital
steps toward realizing its new strategy:
* In September 1999, the Company announced the release of two
families of digital products that cover the gaming, amusement,
industrial and medical markets, thus the Company to be on the
leading edge of technology for its markets.
* On January 4, 2000, the Company announced the establishment
of a 50/50 monitor manufacturing joint venture in Malaysia with
Eastern Asia Technology Ltd. of Singapore. This new company,
Wells Eastern Asia Displays (M) Sdn. Bhd., will produce
globally competitive products to our leading edge designs,
including digital products. This is our first off-shore
manufacturing investment.
* On January 13, 2000, Wells-Gardner announced the acquisition
of American Gaming & Electronics, Inc. (AG&E). AG&E is the
number one independent distributor of parts and service to
gaming customers in North America, and has leased facilities in
Las Vegas, New Jersey and Florida. AG&E also sells re-
manufactured gaming machines. Wells-Gardner expects to add new
locations domestically and internationally in conjunction with
AG&E.
* As part of its strategy to increase its distribution
capabilities, Wells-Gardner announced various agreements to
distribute high quality products from vendors such as Mars
Electronics, JCM, Pacific Electronics, among others.
Company to Develop Own Sales Force
Wells-Gardner will develop its own sales force while retaining
James Industries for specific accounts, thereby taking control of our
brand name and customer relationships as well as reducing the company's
overall selling expenses.
1999 Sales and Earnings
The company reported 1999 sales of $38.3 million, down 10% from
$42.6 million in 1998. The net loss for 1999 was $1.2 million or $0.26
per share, compared to a profit of $974,000, or $0.22 per share in 1998.
<PAGE>
Tragic Loss of One of Our Own
With deep regrets, I report to you the tragic passing of Robert
Smith our purchasing manager. Bob was 38 years old and his
contributions and upbeat personality will be greatly missed by all of
us at Well-Gardner.
Thank you all for your continued support. We are confident that
the strategic realignment of Wells-Gardner will lead to increased
profitability and improved shareholder value.
/s/ Anthony Spier
-----------------
Anthony Spier
Chairman of the Board, President
and Chief Executive Officer
March 10, 2000
<PAGE>
-----------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales decreased 10.0% to $38,335,000 in 1999compared to
$42,590,000 in 1998, while gross margin for 1999 decreased to
$4,964,000 or 12.9% of sales compared to $7,107,000 or 16.7% of sales
in 1998. The percentage decrease is attributed to lower production
based on lower sales. Engineering, selling and administrative expenses
increased to 14.8% of sales or $5,687,000 in 1999 compared to 13.2% or
$5,602,000 in 1998. The percentage increase is reflective of the
Company's initiative to invest in international sales, new product
development, corporate marketing and the amortization of goodwill.
Operating loss for 1999 was $723,000 compared to operating income of
$1,505,000 in 1998. Other expense was $467,000 in 1999 compared to
$505,000 in 1998 as the Company continued to incur debt financing and
interest expense for the acquisition it closed in 1998. The Company
recorded no income tax provision in 1999 compared to $25,000 in 1998.
As of December 31, 1999,the Company has available a net operating loss
carryforward of approximately $2.9 million. Net loss for 1999 was
$1,190,000 compared to net income of $974,000 in 1998. For 1999, basic
and diluted loss per share was 26 cents, compared to basic earnings per
share of 22 cents and diluted earnings per share of 21 cents for 1998.
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales decreased 0.9% to $42,590,000 in 1998 compared to
$42,989,000 in 1997, while gross margin for 1998 increased to
$7,107,000 or 16.7% of sales compared to $6,801,000 or 15.8% of sales
in 1997. Gross margin improved as the Company introduced 10 new
products and realized a benefit of procuring standard-product from
Asia. Engineering, selling and administrative expenses were 13.2% of
sales or $5,602,000 in 1998 compared to 13.2% or $5,677,000 in 1997.
Operating income for 1998 was $1,505,000 compared to $1,124,000 in
1997, an increase of 33.9%. Other expense increased to $505,000 in 1998
compared to $339,000 in 1997 as the Company incurred debt financing and
interest expense for the acquisition it closed in 1998. The Company
recorded an income tax provision of $25,000 in 1998 compared to $10,000
in 1997. The Company continues to utilize its net operating loss
carryforward. As of December 31, 1998, the Company has available a net
operating loss carryforward of approximately $1.5 million. Net income
for 1998 was $974,000 compared to $775,000 in 1997, an increase of
25.7%. For 1998, basic earnings per share were 22 cents and diluted
earnings per share were 21 cents, compared to basic earnings per share
of 18 cents and diluted earnings per share of 17 cents for 1997.
On June 5, 1998, the Company acquired the mechanical coin door and
mechanical coin mechanism business of Coin Controls, Inc. This
consisted 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.
Market and Credit Risks
The Company is subject to certain market risks, mainly interest
rates. At December 31, 1999, the Company had a $1,510,000 revolving
note payable with a variable rate of the London Interbank Offered Rate
(LIBOR) plus 175 basis points. Additionally, at December 31, 1999, the
Company had a $2,736,000 installment note payable with a variable rate
of the London Interbank Offered Rate (LIBOR) plus 225 basis points.
This note has a term of five years with equal monthly principal and
interest payments which began in 1999. Both notes are unsecured.
The Company believes that its exposure to interest rate fluctuations
will be limited due to the Company's philosophy of maintaining a
minimal cash balance in an effort to effectively use any excess cash
flows to reduce outstanding debt. As of December 31, 1999, the Company
had variable rate debt of $4,246,000. An adverse change in interest
rates during the time that this debt is outstanding would cause an
increase in the amount of interest paid. The Company may pay down the
loan at any time. However, a 100 basis point increase in LIBOR would
result in an increase of approximately $43,000 in interest expense
recognized in the financial statements. The Company will continue to
monitor changing economic conditions and based on current
circumstances, does not expect to incur a substantial loss in future
earnings or cash flows as a result of changing interest rates.
<PAGE>
The Company is exposed to credit risk on certain assets, primarily
accounts receivable. The Company provides credit to customers in the
ordinary course of business and performs ongoing credit evaluations.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's
customer base. The Company currently believes its allowance for
doubtful accounts is sufficient to cover customer credit risks.
Liquidity & Capital Resources
Accounts receivable decreased to $4,795,000 in 1999 compared to
$5,149,000 in 1998, while days outstanding were 50 days in 1999
compared to 44 in 1998. Inventory decreased to $8,510,000 in 1999
compared to $8,579,000 in 1998. Inventory turns were 3.92 in 1999
compared to 4.17 in 1998. Accounts payable decreased to $2,128,000 in
1999 compared to $2,548,000 in 1998. The decrease is attributed to
lower inventory purchases. Long-term note payable increased to
$1,510,000 in 1999 compared to $0 in 1998. In 1998, the Company entered
into a long-term installment note payable for $3,350,000 to fund the
acquisition consummated during 1998. At December 31, 1999, the
outstanding balance on the long-term installment note was $2,736,000.
Shareholders' equity decreased to $11,661,000 in 1999 from $12,720,000
in 1998 as book value was $2.57 per share in 1999 compared to $2.97 per
share in 1998. Overall, the Company believes that its future financial
requirements can be met with funds generated from operating activities
and from its credit facility.
Subsequent Events
On January 4, 2000, the Company announced that it entered into a 50
/50 joint venture with Eastern Asia Technology Limited of Singapore to
produce and manufacture open frame video monitors in Malaysia. The
Company anticipates that production will begin in the second quarter,
2000.
On January 13, 2000, the Company announced that it acquired certain
assets of American Gaming and Electronics (AG&E) of Las Vegas, New
jersey and Florida. AG&E is the largest independent distributor of
gaming parts and services in North America and will be operated as a
wholly owned subsidiary. This acquisition will be accounted for under
the purchase method of accounting.
Inflation
During the past three years, management believes that the effect of
inflation on past operations has not been significant and anticipates
that inflation will not have a significant impact on future operations.
Year 2000
The Company experienced no difficulties with Y2K compliance and all
systems functioned properly on or after january 1, 2000. The Company
incurred no significant additional costs in its Y2K compliance efforts.
<PAGE>
</TABLE>
<TABLE>
------------------------------------------------------------------------
BALANCE SHEETS
Years ended December 31,
<CAPTION>
------------------------------------------------------------------------
Assets 1999 1998
------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash & cash equivalents $ 118,944 $ 26,052
Accounts receivable, net of allowances
of $60,000 in 1999, & $85,000 in 1998 4,795,411 5,148,712
Note receivable - 232,369
Inventory 8,510,275 8,579,344
Prepaid expenses 608,917 428,209
------------------------------------------------------------------------
Total current assets $14,033,547 $14,414,686
------------------------------------------------------------------------
Property, Plant & Equipment (at cost):
Land 206,144 206,144
Land improvements 71,970 71,970
Buildings & improvements 3,569,252 3,529,124
Machinery & equipment 7,161,344 6,839,416
------------------------------------------------------------------------
Total property, plant & equipment 11,008,710 10,646,654
Less accumulated depreciation (8,441,676) (7,997,720)
------------------------------------------------------------------------
Property, plant & equipment, net $ 2,567,034 $ 2,648,934
------------------------------------------------------------------------
Other Assets:
Note receivable - 255,152
Intangibles, net 2,188,635 2,352,379
------------------------------------------------------------------------
Total other assets $ 2,188,635 $ 2,607,531
------------------------------------------------------------------------
Total Assets $18,789,216 $19,671,151
------------------------------------------------------------------------
<PAGE>
Liabilities & Shareholders' Equity
------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 2,127,745 $ 2,547,993
Accrued expenses 755,097 1,053,159
Installment note payable 669,996 614,163
------------------------------------------------------------------------
Total current liabilities $ 3,552,838 $ 4,215,315
------------------------------------------------------------------------
Long-Term Liabilities:
Note payable 1,510,000 -
Installment note payable 2,065,841 2,735,837
------------------------------------------------------------------------
Total long-term liabilities $ 3,575,841 $ 2,735,837
------------------------------------------------------------------------
Total Liabilities $ 7,128,679 $ 6,951,152
------------------------------------------------------------------------
Shareholders' Equity:
Common shares, $1 par value; 25,000,000
shares authorized; 4,543,570 shares
issued at December 31, 1999 4,285,912
shares issued at December 31, 1998 4,543,570 4,285,912
Capital in excess of par value 1,869,111 1,526,760
Retained earnings 5,247,856 6,907,327
------------------------------------------------------------------------
Total Shareholders' Equity $11,660,537 $12,719,999
------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $18,789,216 $19,671,151
------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
Years ended December 31,
------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $38,334,557 $42,590,394 $42,988,526
------------------------------------------------------------------------------
Cost & expenses:
Cost of sales 33,370,294 35,483,712 36,187,438
Engineering, selling & administrative 5,687,305 5,602,115 5,677,183
------------------------------------------------------------------------------
Operating income (loss) (723,042) 1,504,567 1,123,905
Other expense, net 466,709 505,433 338,665
------------------------------------------------------------------------------
Earnings (loss) before income taxes (1,189,751) 999,134 785,240
Income tax 0 25,000 10,000
------------------------------------------------------------------------------
Net earnings (loss) $(1,189,751) $ 974,134 $ 775,240
------------------------------------------------------------------------------
Basic net earnings (loss) per share (0.26) 0.22 0.18
------------------------------------------------------------------------------
Diluted net earnings (loss) per share (0.26) 0.21 0.17
------------------------------------------------------------------------------
Basic average common
shares outstanding 4,517,492 4,469,833 4,343,253
Diluted average common
shares outstanding 4,517,492 4,621,372 4,531,097
------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF SHAREHOLDERS' EQUITY
-------------------------------------------------------------
Capital In Total
Common Excess Of Retained Unearned Shareholders'
Shares Par Value Earnings Compensation Equity
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1996 $4,068,426 $1,158,308 $ 5,157,953 $(290,101) $10,094,586
- --------------------------------------------------------------------------------------
Net earnings - - 775,240 - 775,240
Issuance of stock awards 30,400 86,750 - (115,050) 2,100
Stock options exercised 116,257 179,438 - - 295,695
Amortization of unearned
compensation - - - 217,301 217,301
- --------------------------------------------------------------------------------------
December 31, 1997 $4,215,083 $1,424,496 $ 5,933,193 $(187,850) $11,384,922
Net earnings - - 974,134 - 974,134
Issuance of stock awards 14,050 51,700 - (65,750) -
Stock options exercised 56,779 50,564 - - 107,343
Amortization of unearned
compensation - - - 253,600 253,600
- --------------------------------------------------------------------------------------
December 31, 1998 $4,285,912 $1,526,760 $ 6,907,327 - $12,719,999
Net loss - - (1,189,751) - (1,189,751)
Stock dividend issued 214,627 255,093 (469,720) - -
Issuance of stock awards 29,679 62,038 - - 91,717
Shares issued from
stock purchase plan 12,473 24,459 - - 36,932
Stock options exercised 879 761 - - 1,640
- --------------------------------------------------------------------------------------
December 31, 1999 $4,543,570 $1,869,111 $ 5,247,856 - $11,660,537
- --------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CASH FLOWS
Years ended December 31,
---------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(1,189,751) $ 974,134 $ 775,240
Adjustments to reconcile net earnings
(loss) to net cash provided by
(used in) operating activities:
Depreciation & amortization 646,677 507,816 403,989
Amortization of unearned compensation - 253,600 217,301
Changes in current assets & liabilities
(net of effect of acquisition):
Accounts receivable 353,301 83,123 (1,336,030)
Note receivable 487,521 (113,013) (374,508)
Inventory 69,069 1,123,958 (1,912,709)
Prepaid expenses (180,708) (190,754) 212,141
Accounts payable (420,248) (905,259) 1,690,515
Income taxes payable - - 10,000
Accrued expenses (298,062) 170,948 (95,071)
- --------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities $ (532,201) $ 1,904,553 $ (409,132)
- --------------------------------------------------------------------------------
Cash used in investing activities:
Payment for acquisition - (3,350,000) -
Additions to property, plant
& equipment, net (401,033) (335,631) (296,357)
- --------------------------------------------------------------------------------
Net cash used in investing activities $ (401,033) $(3,685,631) $ (296,357)
- --------------------------------------------------------------------------------
Cash provided by (used in)
financing activities:
Borrowings (repayments) from
note payable 1,510,000 (1,800,000) 500,000
Proceeds from (repayments of)
installment note payable (614,163) 3,350,000 -
Proceeds from options exercised
& purchase plan 130,289 107,343 297,795
- --------------------------------------------------------------------------------
Net cash provided by financing
activities $ 1,026,126 $ 1,657,343 $ 797,795
- --------------------------------------------------------------------------------
Net increase (decrease) in cash
& cash equivalents 92,892 (123,735) 92,306
Cash & cash equivalents at
beginning of year 26,052 149,787 57,481
- --------------------------------------------------------------------------------
Cash & cash equivalents at
end of year $ 118,944 $ 26,052 $ 149,787
- --------------------------------------------------------------------------------
Supplemental cash flows disclosure:
Income taxes paid - $ 35,000 -
Interest paid $ 407,616 $ 400,719 $ 222,375
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. DESCRIPTION OF THE BUSINESS
Founded in 1925, Wells-Gardner Electronics Corporation is a
distributor and ISO 9001 certified manufacturer of color video
monitors, video liquid crystal & plasma displays, coin doors, coin
mechanisms and other related distribution products for a wide variety
of markets including, but not limited to, gaming machines, coin-
operated video games, leisure and fitness, automotive, display,
intranet, medical, service and video walls.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash & Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, commercial paper, certificates of deposit and
money market funds, which have an original maturity of three months or
less.
Inventory
Inventory is valued at the lower of first-in, first-out (FIFO)
cost or market.
Property, Plant & Equipment
Property, plant and equipment are stated at cost and are
depreciated for financial reporting purposes over the estimated useful
lives on a straight-line basis as follows:
Buildings 15 - 31 1 /2 years
Machinery & Equipment 5 - 15 years
Revenue Recognition
Revenue from sales of products is recorded at time of shipment.
Earnings Per Share
Basic earnings per share ("EPS") is based on the weighted average
number of shares outstanding whereas diluted EPS includes the dilutive
effect of unexercised common stock options. For all periods reported,
EPS have been restated to reflect the stock dividend issued in 1999.
Financial Instruments
The fair value of the Company's financial instruments does not
materially vary from the carrying value of such instruments.
<PAGE>
Reclassifications
Certain amounts in previously issued financial statements have
been reclassified to conform to the current year's presentation.
Research & Development
Research and development costs for the years ended December 31,
1999, 1998 and 1997 were approximately $1,334,000, $1,536,000 and
$1,786,000, respectively, which were 3.5%, 3.6% and 4.2% of annual
sales, respectively.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amounts should be evaluated. Impairment is measured by comparing the
carrying value to the estimated undiscounted future cash flows expected
to result from the use of the assets and their eventual disposition.
The Company has determined, on the basis that there are no indicators,
that as of December 31, 1999 there has been no impairment in the
carrying values of long-lived assets.
Intangibles
Intangible assets consist primarily of the cost of a purchased
business in excess of the fair value of net assets acquired and are
amortized on a straight-line basis over periods of five and twenty
years. The Company regularly reviews the performance of the acquired
business to evaluate the realizability of the underlying goodwill.
Amortization expense in 1999, 1998 and 1997 was approximately $163,000,
$89,000 and $0 respectively.
Significant Customers
Approximately 32%, 33% and 34% of net sales in 1999, 1998 and
1997, respectively, were to the Company's largest customer.
Stock Dividend
On March 16, 1999, the Company announced a five percent stock
dividend payable to all common stock shareholders of record as of
April 13, 1999. The stock dividend resulted in the issuance of 214,627
additional common shares. All reported earnings per share disclosure
has been restated to reflect this dividend.
<PAGE>
Note 3. RELATED-PARTY TRANSACTIONS
During the period 1997 to 1999, a majority of the Company's sales
were made through a sales representative firm, James Industries Inc.,
whose Chairman and principal shareholder is a substantial beneficial
shareholder and director of the Company. Commissions earned by James
Industries Inc. for the years ended December 31, 1999, 1998 and 1997
were approximately $1,076,000, $1,386,000 and $1,541,000, respectively.
Commissions owed to James Industries Inc. as of December 31, 1999, 1998
and 1997 were approximately $72,000, $148,000 and $246,000
respectively. Total commissions as a percentage of sales for the years
ended December 31, 1999, 1998 and 1997 were 2.8%, 3.2% and 3.6%,
respectively. Sales to James Industries Inc. for the years ended
December 31, 1999, 1998 and 1997 were approximately $261,000, $258,000
and $406,000, respectively. Outstanding accounts receivable due from
James Industries Inc. at December 31, 1999, 1998 and 1997 were
approximately $99,000, $156,000 and $100,000, respectively.
During 1997, the Company entered into an agreement with James
Industries whereby it agreed to sell certain specific products on
extended terms in exchange for a promissory note. Shipments under this
agreement began in September, 1997 and were fully completed in the
first quarter of 1998. The note carries interest at a rate of prime
plus 200 basis points and is personally guaranteed by Jim Roberts,
Chairman and John Blouin, President of James Industries, respectively.
During 1999, James Industries elected to pay off the entire balance
due, thus at December 31, 1999 the balance due was $0.
Note 4. INVENTORY
Inventory consisted of the following components:
-----------------------------------------------
December 31,
-----------------------------------------------
1999 1998
-----------------------------------------------
Raw materials $6,122,748 $6,225,344
Work in progress 401,880 440,049
Finished goods 1,985,647 1,913,951
-----------------------------------------------
Total $8,510,275 $8,579,344
-----------------------------------------------
<PAGE>
Note 5. DEBT
The long-term note payable consisted of a revolving line of credit
balance of $1,510,000 and $0 at December 31, 1999 and 1998, respective-
ly, bearing interest at 7.57% at December 31, 1999. During 1998, the
Company entered into a new, long-term banking agreement with American
National Bank and Trust Company of Chicago. The new agreement provides
for an $8,000,000 revolving line of credit at a rate of either prime
or the London Interbank Offered Rate (LIBOR) plus 175 basis points.
This agreement runs through May 31, 2001. At December 31, 1999 the
Company had an unused balance of $6,490,000 on its line of credit. The
long-term note is uncollateralized with certain covenant restrictions.
During 1998, the Company entered into an uncollateralized
installment note payable for $3,350,000 at a rate of LIBOR plus 225
basis points. The proceeds of this note were used for the acquisition
discussed in Note 11. This note has a term of five years with sixty
equal monthly principal and interest payments, commencing February,
1999.
Note 6. STOCK PLANS
The Company maintains a Non-Qualified Option and Stock Award Plan
under which employees may acquire up to a maximum of 1,470,000 common
shares and a Nonemployee Director Stock Plan under which directors may
acquire up to 262,500 common shares. Options may be granted thru
December 31, 2008 at an option price not less than fair market value on
the date of grant and are exercisable not earlier than six months nor
later than ten years from the date of grant. Options vest over two and
three year periods. As of December 31, 1999, 48 persons held
outstanding options and were eligible to participate in the plans. Such
options expire on dates ranging from April 24, 2000 to January 4, 2009.
The Company applies APB Opinion No. 25 and related Interpretations
in accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. Had compensation cost for
the Company's stock option plans been determined consistent with FASB
Statement of Financial Accounting Standards No. 123 ("FAS 123"), the
Company's net earnings (loss) available to common shareholders and net
earnings (loss) per common share would have been as follows:
------------------------------------------------------------------
1999 1998
------------------------------------------------------------------
Net earnings (loss) available to
common shareholders:
As reported $(1,189,751) $ 974,134
Pro forma (1,225,882) 846,988
Net earnings (loss) per common
and common equivalent share:
Basic as reported (0.26) 0.22
Diluted as reported (0.26) 0.21
Pro forma - Basic (0.26) 0.19
Pro forma - Diluted $ (0.26) $ 0.18
------------------------------------------------------------------
<PAGE>
Under the stock option plans, the exercise price of each option
equals the market price of the Company's stock on the date of grant.
For purposes of calculating the compensation cost consistent with FAS
123, the fair value of each grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in fiscal 1999, 1998 and
1997, respectively: expected volatility of 20 percent; risk free
interest rates ranging from 5.7 percent to 6.8 percent; and expected
lives of 5 years. Additional information on shares subject to options
is as follows:
<TABLE>
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price Options price Options price
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 867,864 $3.98 663,774 $3.56 523,215 $3.35
Granted 334,492 2.51 327,342 4.73 285,789 3.73
Forfeited (38,327) 3.69 (41,583) 4.30 (8,000) 3.50
Exercised (1,251) 2.50 (81,669) 3.49 (137,230) 3.02
-------------------------------------------------------------------------------------------------
Outstanding at end of year 1,162,778 $3.48 867,864 $3.98 663,774 $3.56
-------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted $3.54 $1.38 $1.18
-------------------------------------------------------------------------------------------------
Options exercisable at year end 726,812 449,927 286,405
-------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
---------------------------------------------------------------------------
Weighted
Options average Weighted Options
Range of outstanding at remaining average exercisable at
exercise prices December 31, contractual exercise December 31,
1999 life price 1999
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2.05 - 2.56 282,248 9.0 $2.50 69,608
2.57 - 3.07 229,276 5.1 2.84 229,276
3.08 - 3.58 267,029 6.9 3.55 201,360
3.59 - 4.10 21,288 6.3 4.05 21,288
4.11 - 4.61 281,530 8.4 4.40 142,398
4.62 - 5.12 81,407 5.0 5.12 62,882
---------------------------------------------------------------------------
1,162,778 7.3 $3.54 726,812
---------------------------------------------------------------------------
</TABLE>
<PAGE>
Note 7. ACCRUED EXPENSES
Accrued expenses consisted of the following components:
---------------------------------------------------------
December 31,
1999 1998
----------------------------
Payroll & salary $ 84,028 $ 410,184
Sales commissions 72,191 148,456
Insurance 300,262 149,861
Warranty 185,832 191,115
Other accrued expenses 112,784 153,543
---------------------------------------------------------
Total $ 755,097 $1,053,159
---------------------------------------------------------
Note 8. OTHER EXPENSE, NET
Other expense, net consisted of the following components:
---------------------------------------------------------
December 31,
---------------------------------
1999 1998 1997
---------------------------------------------------------
Interest expense $407,616 $400,719 $222,375
Other expense, net 110,993 183,590 151,019
Other income, net (51,900) (78,876) (34,729)
---------------------------------------------------------
Other expense, net $466,709 $505,433 $338,665
---------------------------------------------------------
Note 9. INCOME TAXES
The effective income tax rates for 1999, 1998 and 1997 differed from
the expected Federal income tax rate (34%)for the following reasons:
-------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------
Computed expected
tax expense
(benefit) $(405,000) $ 340,000 $ 281,000
State income tax
expense (benefit) net
of Federal tax effect (51,000 37,000 40,000
Other, net 40,000 (59,000) 12,000
Change in valuation
allowance 416,000 (293,000) (323,000)
- $ 25,000 $ 10,000
<PAGE>
Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities for financial reporting
purposes and as measured by income tax regulations. Temporary
differences which gave rise to deferred tax assets and deferred tax
liabilities at December 31 1999 and 1998 consisted of:
-------------------------------------------------------------
1999 1998
-------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful
accounts $ 23,000 $ 33,000
Warranty reserve 72,000 74,000
Inventory reserve 114,000 175,000
Deferred compensation - 1,000
Net operating loss
carryforwards 1,135,000 586,000
Alternative minimum tax
credit carryforwards 62,000 74,000
General business credit
carryforwards 129,000 129,000
Other 9,000 6,000
-------------------------------------------------------------
Total gross deferred tax
assets 1,544,000 1,078,000
Less valuation allowance (1,423,000) (1,007,000)
-------------------------------------------------------------
Net deferred tax assets 121,000 71,000
Deferred tax liabilities:
Deferred compensation 41,000 -
Property, plant & equipment,
principally depreciation 80,000 71,000
-------------------------------------------------------------
Net deferred taxes - -
-------------------------------------------------------------
A valuation allowance is provided when it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The net change in the valuation allowance for the year ended
December 31, 1999 was an increase of $416,000. At December 31, 1999,
the Company has net operating loss carryforwards for Federal income tax
purposes of approximately $2,940,000 which are available to offset
future Federal taxable income, if any, through 2019. The Company also
has alternative minimum tax credit carryforwards of approximately
$62,000 which are available to reduce future Federal regular income
taxes, if any, over an indefinite period. In addition, the Company has
general business credit carryforwards of approximately $129,000 which
are available to reduce future Federal regular income taxes, if any.
These general business credits are scheduled to expire during 2004
through 2008.
<PAGE>
Note 10. EARNINGS (LOSS) PER SHARE
During 1999, the Company announced a five percent stock dividend
payable to all common stock shareholders of record as of April 13,
1999. All reported earnings per share disclosure has been restated to
reflect this dividend. In accordance with Statement of Financial
Accounting Standards No. 128 "Earnings Per Share ("EPS")," the
following table presents a reconciliation of the numerators and
denominators of basic and diluted earnings per common share for the
years ended December 31, 1999, 1998 and 1997:
------------------------------------------------------------------------
December 31,
------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------
Basic EPS:
Net income (loss) $(1,189,751) $ 974,134 $ 775,240
Weighted average
common shares
outstanding 4,517,492 4,469,833 4,343,253
Per share amount $ (0.26) $ 0.22 $ 0.18
------------------------------------------------------------------------
Diluted EPS:
Net income (loss) $(1,189,751) $ 974,134 $ 775,240
Weighted average
common shares
outstanding 4,517,492 4,469,833 4,343,253
Add: Effect of dilutive
stock options - 151,539 187,844
------------------------------------------------------------------------
Adjusted weighted average
common shares outstanding 4,517,492 4,621,372 4,531,097
Per share amount $ (0.26) $ 0.21 $ 0.17
------------------------------------------------------------------------
Options which had an anti-dilutive effect at December 31, 1999, 1998
and 1997 were 679,205, 374,092 and 58,000, respectively and were
excluded from the diluted earnings per share calculation.
Note 11. ACQUISITION
In 1998, the Company acquired the mechanical coin door and
mechanical coin mechanism business of Coin Controls, Inc. This
acquisition was accounted for under the purchase method of accounting.
The effect of the pro forma results of operations had the acquisition
occurred at the beginning of each year was immaterial.
<PAGE>
Note 12. LEASE COMMITMENTS
The Company leases certain data processing and other equipment under
lease agreements expiring through the year 2003. The following is a
schedule of future minimum lease payments required under operating
leases as of December 31, 1999:
-------------------------------------------
Years ending December 31, Amount
-------------------------------------------
2000 $185,677
2001 184,754
2002 81,069
2003 22,684
2004 13,945
Thereafter
-------------------------------------------
$488,129
-------------------------------------------
Rent expense related to operating leases was approximately $161,000,
$50,000 and $38,000 during the years ended December 31, 1999, 1998 and
1997, respectively.
Note 13. UNAUDITED QUARTERLY FINANCIAL DATA
Selected quarterly data for 1999 and 1998 are as follows: (In
thousands except per-share data)
------------------------------------------------------------------
1999
------------------------------------------------------------------
First Second Third Fourth
------------------------------------------------------------------
Net sales $9,207 $11,035 $ 9,086 $9,007
Net earnings (loss) (245) 404 31 (1,380)
Basic net earnings
(loss) per share (0.05) 0.09 0.00 (0.30)
Diluted net earnings
(loss) per share $(0.05) $ 0.09 $ 0.00 $(0.30)
------------------------------------------------------------------
------------------------------------------------------------------
1998
------------------------------------------------------------------
First Second Third Fourth
------------------------------------------------------------------
Net sales $8,983 $12,983 $ 9,965 $10,659
Net earnings 154 547 131 142
Basic net earnings
per share 0.04 013 0.03 0.02
Diluted net earnings
per share $ 0.04 $ 0.12 $ 0.03 $ 0.02
------------------------------------------------------------------
<PAGE>
[KPMG LOGO]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Wells-Gardner Electronics Corporation:
We have audited the accompanying balance sheets of Wells-Gardner
Electronics Corporation as of December 31, 1999 and 1998 and the
related statements of operations, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1999.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Wells-
Gardner Electronics Corporation at December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
/s/ KPMG
Chicago, Illinois
January 27, 2000
<PAGE>
--------------------------------------------------------------------------
BOARD OF DIRECTORS OFFICERS
------------------ --------
Anthony Spier Anthony Spier
Chairman, President & Chairman, President &
Chief Executive Officer Chief Executive Officer
John R. Blouin Kathleen E. Hoppe
President of James Director of Information Technology
Industries, Inc.
Mark E. Komorowski
Marshall L. Burman Vice President of Sales
Counsel with Wildman,
Harrold, Allen & Dixon Larry S. Mahl
Director of Materials
Jerry Kalov
President of Kay Consulting John S. Pircon
Vice President of Marketing
Ira J. Kaufman
Senior Managing Director of Jeffrey A. Sterling
Mesirow Financial, Inc. Vice President of Engineering
Frank R. Martin Eric A. Slagh
Senior Partner of Righeimer, Director of Quality
Martin & Cinquino, P.C.
George B. Toma CPA, CMA
James J. Roberts, Jr. Vice President of Finance,
Chairman & Chief Executive Officer Chief Financial Officer, Treasurer
of James Industries, Inc. & Corporate Secretary
Randall S. Wells Randall S. Wells
Executive Vice President Executive Vice President
& General Manager & General Manager
Ernest R. Wish
Chairman of WRM, Inc.
--------------------------------------------------------------------------
<PAGE>
OFFICES WHOLLY OWNED SUBSIDIARIES
CORPORATE American Gaming & Electronics, Inc.
Wells-Gardner Electronics Corporation 6255 McLeod Drive, Suite 22
2701 North Kildare Avenue Las Vegas, Nevada 89120
Chicago, Illinois 60639 Telephone: 702/798-5752
Telephone: 773/252-8220 19 Tilton Street
Fax: 773/252-8072 Hammonton, New Jersey 08037
Internet: www.wgec.com Telephone: 609/567-1117
2046 McKinley Street
JOINT VENTURE Hollywood, Florida 33020
------------- Telephone: 954/922-9952
Wells Eastern Asia 280 Greg Street, Suite 3
Displays (M) SDN BHD Reno, Nevada 89502
Lot 316 & 317 Telephone: 775/786-8112
Jalan PKNK 3/2
Sungai Petani Industrial Estate
08000
Sungai Petani, Kedah, Malaysia
Telephone: 60-4-441-1336
--------------------------------------------------------------------------
CORPORATE INFORMATION CORPORATE BANKERS
-----------------
American National Bank & Trust
ANNUAL MEETING Chicago, Illinois
--------------
The annual meeting of shareholders INDEPENDENT AUDITORS
will take place on April 25, 2000 --------------------
at 2:00 p.m. at the corporate KPMG LLP
offices of the Company. Chicago, Illinois
FORM 10-K GENERAL COUNSEL
--------- ---------------
A copy of the Company's annual report Katten Muchin & Zavis
on Form 10-K, without exhibits, as Chicago, Illinois
filed with the Securities and
Exchange Commission is available INVESTMENT BANKERS
without charge upon written request ------------------
to Mr. George B. Toma at the Mesirow Financial
corporate offices of the Company. Chicago, Illinois
TRANSFER AGENT
LaSalle National Bank
135 South LaSalle Street
Chicago, Illinois 60603
Telephone: 800/246-5761
EXHIBIT 23
Independent Auditors' Report
The Board of Directors and Shareholders of
Wells-Gardner Electronics Corporation:
Under date of January 27, 2000, we reported on the balance sheets of
Wells-Gardner Electronics Corporation (Company) as of December 31, 1999
and 1998, and the related statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period
ended December 31, 1999, which are included in the 1999 annual report
to shareholders. These financial statements and our report thereon are
incorporated by reference in the December 31, 1999 annual report on
Form 10-K. In connection with our audits of the aforementioned
financial statements, we also audited the related financial statement
schedule. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion
on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
Chicago, Illinois
January 27, 2000
EXHIBIT 23
CONSENT OF KPMG LLP
The Board of Directors and Shareholders
Wells-Gardner Electronics Corporation:
We consent to incorporation by reference in the Registration Statements
on Form S-8 (#2-72090, #2-09137, #33-63920, #33-61535, #33-02981 and
#333-72629) of Wells-Gardner Electronics Corporation of our reports
dated January 27, 2000, relating to the balance sheets of Wells-Gardner
Electronics Corporation as of December 31, 1999 and 1998, and the
related statements of operations, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1999,
and the related schedule, which reports are included in or incorporated
by reference in the December 31, 1999 annual report on Form 10-K of
Wells-Gardner Electronics Corporation.
Chicago, Illinois
March 15, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 118,944
<SECURITIES> 0
<RECEIVABLES> 4,855
<ALLOWANCES> 60
<INVENTORY> 8,510
<CURRENT-ASSETS> 14,034
<PP&E> 11,009
<DEPRECIATION> 8,442
<TOTAL-ASSETS> 18,789
<CURRENT-LIABILITIES> 3,553
<BONDS> 0
0
0
<COMMON> 4,544
<OTHER-SE> 7,117
<TOTAL-LIABILITY-AND-EQUITY> 18,789
<SALES> 38,335
<TOTAL-REVENUES> 38,335
<CGS> 33,370
<TOTAL-COSTS> 39,058
<OTHER-EXPENSES> 467
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 408
<INCOME-PRETAX> (1,190)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,190)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,190)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
