Table Of ContentsUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2014 |
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 Number1-8250
WELLS-GARDNER ELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
Illinois | 36-1944630 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
9500 West 55th Street, Suite A, McCook, Illinois | 60525-3605 |
(Address of principal executive offices) | (Zip Code) |
(708) 290-2100
(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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | | Accelerated filer | ☐ |
| | | | | |
Non-accelerated filer | ☐ | | Smaller reporting company | ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of May 9, 2014 approximately 11,771,000 shares of the Common Stock, $1.00 par value of the registrant were outstanding.
WELLS-GARDNER ELECTRONICS CORPORATION
FORM 10-Q TABLE OF CONTENTS
For The Three Months Ended March 31, 2014
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
WELLS-GARDNER ELECTRONICS CORPORATION
Condensed Consolidated Statements of Earnings (unaudited)
Three Months Ended March 31, 2014 and 2013
| | | Three Months Ended March 31 | |
| | | 2014 | | | 2013 | |
Net sales | | $ | 12,460,000 | | | $ | 18,031,000 | |
Cost of sales | | | 10,394,000 | | | | 15,071,000 | |
Gross margin | | | 2,066,000 | | | | 2,960,000 | |
Engineering, selling & administrative expenses | | | 1,947,000 | | | | 2,373,000 | |
Operating Earnings | | | 119,000 | | | | 587,000 | |
Interest expense | | | 15,000 | | | | 37,000 | |
Other income, net | | | (5,000 | ) | | | 0 | |
Income tax expense | | | 38,000 | | | | 1,000 | |
Net Earnings | | $ | 71,000 | | | $ | 549,000 | |
| | | | | | | | | |
Earnings per share: | | | | | | | | |
Basic earnings per share | | $ | 0.01 | | | $ | 0.05 | |
Diluted earnings per share | | $ | 0.01 | | | $ | 0.05 | |
| | | | | | | | | |
Basic average common shares outstanding | | | 11,731,842 | | | | 11,692,765 | |
Diluted average common shares outstanding | | | 11,731,842 | | | | 11,695,171 | |
See accompanying notes to the unaudited condensed consolidated financial statements
WELLS-GARDNER ELECTRONICS CORPORATION
Condensed Consolidated Balance Sheets
| | | March 31, | | | March 31, | | | December 31, | |
| | | 2014 | | | 2013 | | | 2013 | |
| | | (unaudited) | | | (unaudited) | | | | | |
Assets: | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | |
Cash | | $ | 330,000 | | | $ | 41,000 | | | $ | 464,000 | |
Accounts receivable, net | | | 7,001,000 | | | | 9,311,000 | | | | 7,481,000 | |
Accounts receivable, subcontractor | | | 2,451,000 | | | | 3,872,000 | | | | 4,062,000 | |
Inventory | | | 11,341,000 | | | | 9,769,000 | | | | 11,840,000 | |
Current deferred tax asset, net | | | 170,000 | | | | 133,000 | | | | 170,000 | |
Prepaid expenses & other assets | | | 677,000 | | | | 1,169,000 | | | | 650,000 | |
Total current assets | | $ | 21,970,000 | | | $ | 24,295,000 | | | $ | 24,667,000 | |
| | | | | | | | | | | | | |
Property, plant & equipment, net | | | 159,000 | | | | 229,000 | | | | 160,000 | |
| | | | | | | | | | | | | |
Other assets: | | | | | | | | | | | | |
Deferred tax asset, net | | | 327,000 | | | | 336,000 | | | | 327,000 | |
Other long term receivable | | | 272,000 | | | | 99,000 | | | | 231,000 | |
Goodwill | | | 1,329,000 | | | | 1,329,000 | | | | 1,329,000 | |
Total other assets | | | 1,928,000 | | | | 1,764,000 | | | | 1,887,000 | |
Total assets | | $ | 24,057,000 | | | $ | 26,288,000 | | | $ | 26,714,000 | |
| | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | |
Accounts payable | | $ | 5,006,000 | | | $ | 3,833,000 | | | $ | 3,058,000 | |
Accounts payable, subcontractor | | | 1,408,000 | | | | 3,251,000 | | | | 4,046,000 | |
Accrued expenses | | | 883,000 | | | | 1,345,000 | | | | 1,445,000 | |
Total current liabilities | | $ | 7,297,000 | | | $ | 8,429,000 | | | $ | 8,549,000 | |
| | | | | | | | | | | | | |
Long-term liabilities: | | | | | | | | | | | | |
Note payable | | | 100,000 | | | | 1,461,000 | | | | 1,598,000 | |
Total liabilities | | $ | 7,397,000 | | | $ | 9,890,000 | | | $ | 10,147,000 | |
| | | | | | | | | | | | | |
Shareholders' Equity: | | | | | | | | | | | | |
Common stock: authorized 25,000,000 shares$1.00 par value; shares issued and outstanding:11,771,286 shares as of March 31, 201411,729,898 shares as of March 31, 201311,700,286 shares as of December 31, 2013 | | $ | 11,771,000 | | | $ | 11,730,000 | | | $ | 11,700,000 | |
Additional paid-in capital | | | 5,212,000 | | | | 5,193,000 | | | | 5,157,000 | |
Accumulated deficit | | | (2,000 | ) | | | (175,000 | ) | | | (73,000 | ) |
Unearned compensation | | | (321,000 | ) | | | (350,000 | ) | | | (217,000 | ) |
Total shareholders' equity | | �� | 16,660,000 | | | | 16,398,000 | | | | 16,567,000 | |
Total liabilities & shareholders' equity | | $ | 24,057,000 | | | $ | 26,288,000 | | | $ | 26,714,000 | |
See accompanying notes to the unaudited condensed consolidated financial statements
WELLS-GARDNER ELECTRONICS CORPORATION
Condensed Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 2014 and 2013
| | | Three Months Ended | |
| | | March 31 | | | March 31 | |
| | | 2014 | | | 2013 | |
Cash flows from operating activities: | | | | | | | | |
Net earnings | | $ | 71,000 | | | $ | 549,000 | |
Adjustments to reconcile net earnings tonet cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 18,000 | | | | 42,000 | |
Bad debt expense | | | 4,000 | | | | 6,000 | |
Amortization of unearned compensation | | | 22,000 | | | | 20,000 | |
Increase in long term receivable | | | (41,000 | ) | | | (35,000 | ) |
Changes in current assets & liabilities | | | | | | | | |
Accounts receivable | | | 476,000 | | | | (653,000 | ) |
Inventory | | | 499,000 | | | | 1,048,000 | |
Prepaid expenses & other | | | (27,000 | ) | | | (314,000 | ) |
Accounts payable | | | 1,948,000 | | | | (334,000 | ) |
Due to/from subcontractor | | | (1,027,000 | ) | | | 890,000 | |
Accrued expenses | | | (562,000 | ) | | | 305,000 | |
Net cash provided by operating activities | | $ | 1,381,000 | | | $ | 1,524,000 | |
| | | | | | | | | |
Cash used in investing activities: | | | | | | | | |
Additions to plant & equipment, net | | | (17,000 | ) | | | (14,000 | ) |
Net cash used in investing activities | | $ | (17,000 | ) | | $ | (14,000 | ) |
| | | | | | | | | |
Cash used in financing activities: | | | | | | | | |
Repayments - note payable | | | (1,498,000 | ) | | | (2,240,000 | ) |
Proceeds from shares issued, options exercised and purchase plan | | | 0 | | | | 3,000 | |
Net cash used in financing activities | | $ | (1,498,000 | ) | | $ | (2,237,000 | ) |
| | | | | | | | | |
Net decrease in cash | | | (134,000 | ) | | | (727,000 | ) |
Cash at beginning of period | | | 464,000 | | | | 768,000 | |
Cash at end of period | | $ | 330,000 | | | $ | 41,000 | |
| | | | | | | | | |
Supplemental cash flow disclosure: | | | | | | | | |
Interest paid | | | 15,000 | | | | 37,000 | |
Taxes paid | | | 38,000 | | | | 0 | |
See accompanying notes to the unaudited condensed consolidated financial statements
WELLS-GARDNER ELECTRONICS CORPORATION
Notes to the Unaudited 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. These condensed consolidated financial statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information or footnotes necessary for a complete presentation in conformity with accounting principles generally accepted in the United States. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company's 2013 Annual Report to Shareholders. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the operating results for the full year.
2. Basic earnings per share are based on the weighted average number of shares outstanding whereas diluted earnings per share include the dilutive effect of unexercised common stock equivalents. Potentially dilutive securities are excluded from diluted earnings per share calculations for periods with a net loss.
3. Revenue from video gaming terminal sales with standard payment terms is recognized upon the passage of title and transfer of the risk of loss. The Company recognizes revenue even if it retains a form of title to products delivered to customers, provided the sole purpose is to enable the Company to recover the products in the event of a customer payment default and the arrangement does not prohibit the customer’s use of the product in the ordinary course of business.
4. The fair value of the Company’s financial instruments does not materially vary from the carrying value of such instruments.
5. Certain amounts in previously issued financial statements have been reclassified to conform to the current year’s presentation.
6. The Company maintains an Incentive Stock Option Plan and a Stock Award Plan under which officers and key employees may acquire up to a maximum of 2,155,028 common shares.
Stock Options
Under the Incentive Stock Option Plan, which expired in 2008, no options have been awarded since 2004. At March 31, 2014 there are 7,573 options outstanding that are fully vested and exercisable, with a weighted average exercise price of $2.62, and aggregate intrinsic value of $0. The options expired unexercised in April 2014.
Restricted Shares
All restricted shares granted are governed by the Company’s Stock Award Plan, which was approved by shareholders in 2000. As of March 31, 2014, 198,530 restricted shares are outstanding on a dividend adjusted basis. The employees will earn the restricted shares in exchange for services to be provided to the Company over a three-year or five-year vesting period. Total unrecognized compensation cost related to unvested stock awards is approximately $321,000 and is expected to be recognized over a weighted average period of 2.5 years.
The following table summarizes information regarding Restricted Share activity for the three months ending March 31, 2014:
| | | Shares | | Weighted Average Grant Date Fair Value |
Unvested at December 31, 2013 | | | 147,130 | | | $ | 2.16 | |
Granted | | | 71,000 | | | $ | 1.78 | |
Vested | | | (19,600 | ) | | $ | 2.22 | |
Forfeited | | | 0 | | | $ | 0.00 | |
Unvested, March 31, 2014 | | | 198,530 | | | $ | 2.02 | |
7. Our inventory detail as of March 31, 2014, March 31, 2013 and December 31, 2013 was as follows:
| | | March 31, | | | March 31, | | | December 31, | |
(in $000's) | | 2014 | | | 2013 | | | 2013 | |
| | | (unaudited) | | | (unaudited) | | | | | |
Inventory: | | | | | | | | | | | | |
Raw materials | | $ | 3,377 | | | $ | 3,200 | | | $ | 3,009 | |
In transit finished goods | | | 738 | | | | 429 | | | | 2,291 | |
Finished goods | | | 7,226 | | | | 6,140 | | | | 6,540 | |
Total | | $ | 11,341 | | | $ | 9,769 | | | $ | 11,840 | |
| | | | | | | | | | | | | |
8. As of March 31, 2014, the Company had total outstanding bank debt of $0.1 million at an average interest rate of 3%. The Company is in compliance with all of its covenants at March 31, 2014.
9. An income tax 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 three months ended March 31, 2014 was a decrease of $25,000 to recognize the decrease in deferred tax assets during the first three months. The net deferred tax asset of $497,000 as of March 31, 2014 represents the Company’s belief that it is more likely than not that a profit will be generated over the next twelve to eighteen months which will allow the Company to use a portion of the current net operating loss carry forwards. As of December 31, 2013, the Company has net operating loss carry forwards for Federal income tax purposes of approximately $4,978,000, which are available to offset future Federal taxable income, if any, that begin to expire in 2021. The Company also has a net operating loss carry forward for Illinois state income tax purposes of approximately $5,823,000 as of December 31, 2013. The Company also has alternative minimum tax credit carry forwards of approximately $136,000, which are available to reduce future Federal regular income taxes, if any, over an indefinite period. No unrecognized tax benefits are set to expire in the next twelve months that may have an impact upon the Company’s effective tax rate. The Company files tax returns in the U.S. federal jurisdiction and various state jurisdictions. The tax years 2010, 2011, 2012 and 2013 remain open to examinations. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. During the three months ended March 31, 2014, the Company did not recognize expense for interest or penalties related to income tax, and do not have any amounts accrued at March 31, 2014, as the Company does not believe it has taken any uncertain income tax positions.
10. The Company’s goodwill resulting from its purchase of American Gaming and Electronics, Inc. (AGE) is tested for impairment at least annually, which the Company does in the fourth quarter or more often if circumstances warrant. The Company determined that there was no impairment of goodwill in 2013 and 2012 by utilization of a discounted cash flow analysis. The model utilizes numerous assumptions, including but not limited to future sales estimates of AGEs traditional products and of Video Gaming Terminals (VGTs) related to the new Illinois VGT business. Due to the nature of such estimates, there is no certainty in future periods that the Fair Value of the American Gaming & Electronics reporting unit will exceed its carrying value.
11. Recently issued accounting pronouncements – None.
12. The Company has evaluated subsequent events through the date the condensed consolidated financial statements were issued for the three months ended March 31, 2014.
Item 2. Management's Discussion & Analysis of Financial Condition & Results of Operations
Three Months Ended March 31, 2014 & 2013
For the first quarter ended March 31, 2014, net sales decreased $5.6 million or 31% to $12.4 million compared to $18.0 million in the first quarter 2013. Monitor sales decreased $5.3 million or 49% to $5.4 million in the first quarter 2014 compared to $10.7 million in the first quarter 2013 representing 44% of total sales in the 2014 period compared to 60% in 2013. This was due to the total display unit volume decrease of 46 % to 17,600 units in 2014 compared to 32,900 units in 2013 plus an average selling price decrease of 5 %. Parts & VGT sales decreased $0.3 million or 4% to $7.0 million in the first quarter 2014 compared to $7.3 million in the first quarter 2013 representing 56% of total sales in the 2014 period compared to 40% in 2013. Parts sales increased noticeably off a small base while VGT sales declined slightly in the first quarter 2014 compared to the same period in 2013.
Gross margin for the first quarter 2014 decreased $0.9 million or 30% to $2.1 million or 16.6% of sales compared to $3.0 million or 16.4% in the first quarter 2013. Monitor gross margins decreased by $1.1 million with about four fifths of the decline due to volume and one fifth due to lower overhead absorption and selling prices. Parts & VGT gross margins increased by $0.2 million due to a more favorable product mix with more growth in parts than VGTs.
Operating expenses decreased $426,000 to $1.95 million in the first quarter 2014 compared to $2.37 million in the first quarter 2013. Operating expenses decreased $153,000 to supporting monitor engineering, $95,000 to support sales, $98,000 for sales commissions and $79,000 for administrative expenses in the first quarter 2014 compared to the first quarter 2013. Notwithstanding the operating expense decreases, the lower sales increased operating expenses as a percent of sales to 15.6% in the quarter from 13.2% of sales in the same quarter last year.
Operating earnings were $119,000 in the first quarter 2014 compared to $587,000 in the first quarter 2013 resulting in a $468,000 operating earnings decline. This decline was due to significantly lower monitor sales and margins exceeding the operating expense decreases for the first quarter this year compared to the first quarter last year.
Interest expense was $15,000 in the first quarter 2014 compared to $37,000 in the first quarter 2013 due to very low debt balances. Other income was $5,000 in the first quarter 2014 and zero in the first quarter 2013.
Income tax expense was $38,000 in the first quarter 2014 compared to $1,000 in the first quarter 2013. The Company has available a net operating loss carry forward of approximately $5.0 million as of March 31, 2014.
Net income was $71,000 in the first quarter 2014 compared to net income of $549,000 in the first quarter 2013. For the first quarter 2014 basic and diluted earnings per share was $0.01 compared to basic and diluted earnings per share of $0.05 in the first quarter 2013.
Strategic Review
On December 4, 2013 the Board of Directors of Wells-Gardner Electronics Corporation authorized management to explore strategic alternatives. The Company has retained El Segundo, California-based Innovation Capital as its financial advisor to conduct a thorough review of the Company’s business and assetsand to provide recommendations for consideration by the Wells-Gardner Board of Directors. There can be no assurance that this evaluation process will result in any transaction. Management will report the results of the strategic review at the conclusion of the process.
Outlook
Based on its best estimates and information available at this time, management believes full year 2014 net sales will be between $48 million and $52 million compared to $57.9 million last year. The first quarter 2014 is expected to be the most challenging quarter of the year. This sales guidance is based upon the assumption that the City of Chicago does not opt in to the VLT program in 2014.In addition, the Company continues to work on new large screen size and new small screen size products that we expect will contribute to improved sales and margins in the future. We will continue to aggressively control costs and inventory levels.
Liquidity & Capital Resources
Net income plus non cash adjustments for the first quarter 2014 was $74,000.
Accounts receivable decreased $476,000 to $7,001,000 in the first quarter. Accounts receivable days outstanding increased to 51 days on March 31, 2014 from 50 days at year end 2013. Inventory decreased by $499,000 million to $11,341,000 on March 31, 2014. Due to lower monitor sales in the first quarter, days in inventory increased to 99 days at March 31, 2014 compared to 95 days at year end 2013. Prepaid expenses increased by $27,000 during the first quarter 2014. Accounts payable increased $1.9 million in the first quarter 2014 to $5,006,000. Accounts payable days outstanding increased to 82 days on March 31, 2014 from 40 days at year end 2013. Due to subcontractors decreased more than due from subcontractors by $1.1 million in the first quarter 2014 due to lower production in the first quarter compared to the last quarter 2013. Accrued expenses decreased by $562,000 in the first quarter.
As a result, cash provided by operating activities during the first quarter ended March 31, 2014 was $1,381,000.
During the first quarter 2014, cash used by investing activities was $17,000 primarily for the purchase of IT software and equipment.
Long-term notes payable decreased $1,498,000 to $100,000 on March 31, 2014 from $1,598,000 on December 31, 2013. Proceeds from options exercised were $3,000 during the first quarter 2014.
The net decrease in cash was $134,000 from December 31, 2013 to March 31, 2014 leaving the Company’s cash balance at $330,000 at March 31, 2014.
The Company is subject to certain market risks, mainly interest rates. On August 21, 2006, the Company entered into its first credit facility with Wells Fargo Bank NA. On September 15, 2009, the Company amended the term of the credit agreement extending it to August 21, 2013. The amended credit agreement is a $12 million revolving credit facility. The credit facility has several financial covenants including a minimum book net worth, minimum net earnings, maximum capital expenditures and maximum compensation increases. The financial covenants included a provision that any future write off of goodwill will be an add back to the net worth and earnings covenants.
On March 4, 2011, the Company amended the term of the credit agreement to August 21, 2014, the interest rate to LIBOR plus 375 basis points, and the minimum book net worth and minimum net earnings covenants were modified for the first three quarters of 2011 to account for the investment the Company was making into the Video Gaming Terminal market with the year end 2011 covenants remaining the same.On March 5, 2012, the Company amended the term of the credit agreement to August 21, 2015. The amendment includeda waiver for the fourth quarter 2011 minimum book net worth and minimum net earnings covenants and eliminated the book net worth covenant for future periods. The financial covenants for the first three quarters 2012 were modified to account for the investment the Company was making into the Video Gaming Terminal market with the year end 2012 covenants remaining the same. The amendment also increased the year end minimum earnings covenant to $300,000 for 2013 and 2014, and raised the capital expenditure limit to $400,000 per year for 2013, 2014 and 2015.On March 8, 2013, the Company amended the term of the credit agreement to August 21, 2016, the interest rate to LIBOR plus 275 basis points, changed the year end minimum net earnings to $200,000 for 2013, 2014 and 2015, reduced the borrowing base block to $250,000, and created a basket of $1,250,000 for small acquisitions or stock buy backs as long as the Company has excess availability of $2,500,000 both before and after making the permitted acquisition or permitted redemption of Company stock.
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 loans at any time; however, monthly interest charges are not less than $5,000 per month to termination. All bank debt is due and payable on August 21, 2016.As of March 31, 2014, the Company had total outstanding bank debt of $100,000 at an average interest rate of 3.0%. In addition, the Company pays $18,000 credit insurance on selected foreign receivables.
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 Form 10-K filing. The Company undertakes no, and hereby disclaims any, 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 3. Quantitative & Qualitative Disclosures about Market Risk
There have been no material changes to the Company’s market risk during the three months ended March 31, 2014. For additional information on market risk, refer to the “Quantitative and Qualitative Disclosures about Market Risk” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
The Company is subject to certain market risks, mainly interest rate risk. In August 2006, the Company entered into its first credit facility with Wells Fargo Bank. In September 2009, the Company entered into a three-year extension of the credit facility. On March 4, 2011, March 5, 2012, and March 8, 2013, respectively, the Company entered into another additional one year extension of the credit facility and each time made certain other modifications to covenants primarily related to delays in the start up of the Illinois VGT business. The credit agreement currently expires in August, 2016.
As of March 31, 2014, the Company had total outstanding bank debt of $100,000 at an average interest rate of 3.0%. The loan is at three month Libor plus 2.75% with a minimum interest charge of $5,000 per month. All of the Company’s debt is subject to variable interest rates at this time. An adverse change in interest rates during the time that this debt is outstanding would cause an increase in the amount of interest paid. If the debt would exceed approximately $1.9 million, then a 100 basis point increase in interest rates would result in additional interest expense recognized in the condensed consolidated financial statements. The Company may make payments towards the loans at any time without penalty.
The Company is exposed to credit risk on certain assets, primarily accounts receivable. The currency risk is minimal as substantially all of the Company’s sales are billed in US dollars. 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 except for the Company’s largest customers.
Item 4. Controls & Procedures
The Company has established a Disclosure Committee, which is made up of the Company’s Chief Executive Officer, Chief Financial Officer and other members of management. The Disclosure Committee conducts an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. While the Company has limited resources and cost constraints due to its size, based on the evaluation required by Rule 13a-15(b), the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them. As of March 31, 2014, there have been no known significant changes in internal controls or in other factors that could significantly affect these controls.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
NONE
Item 1A. Risk Factors
There have been no material changes to the description of the risk factors associated with the Company's business previously disclosed in Part I, Item 1 "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in the Company's Annual Report on Form 10-K as they could materially affect our business, financial condition and future results. The risks described in the Company's Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known, or that are currently deemed to be immaterial, also may materially and adversely affect the Company's business, financial condition or operating results.
Item 5. Other Information
Submission of Matters to a Vote of Security Holders
Wells-Gardner Electronics Corporation (the "Company") held its Annual Meeting of Shareholders on May 13, 2014. The following is a summary of the matters voted on at that meeting.
(a) | The shareholders elected the Company's entire Board of Directors. The persons elected to the Company's Board of Directors and the number of shares cast for, the number of shares withheld, and broker non-votes, with respect to each of these persons, were as follows: |
| Name | | Votes For | | Votes Withheld | | Broker Non-Votes | |
| | | | | | | | |
| Merle H. Banta | | 4,406,000 | | 164,000 | | 4,570,000 | |
| Marshall L. Burman | | 4,410,000 | | 160,000 | | 4,570,000 | |
| Frank R. Martin | | 4,418,000 | | 152,000 | | 4,570,000 | |
| Anthony Spier | | 4,392,000 | | 178,000 | | 4,570,000 | |
(b) | The shareholders ratified the advisory approval of named executive officer compensation for the fiscal year ending December 31, 2013. The number of shares cast in favor of the ratification, the number against, the number abstaining, and broker non-votes were as follows: |
| For | | Against | | Abstain | | Broker Non-Votes | |
| 4,264,000 | | 238,000 | | 68,000 | | 5,325,000 | |
(c) | The shareholders ratified the appointment of Plante & Moran, PLLC, as independent certified public accountants of the Company for the fiscal year ending December 31, 2014. The number of shares cast in favor of the ratification of Plante & Moran, PLLC, the number against, the number abstaining, and broker non-votes were as follows: |
| For | | Against | | Abstain | | Broker Non-Votes | |
| 9,330,000 | | 483,000 | | 82,000 | | 0 | |
Material Changes to Procedures by Which Security Holders Recommend Nominees
NONE
Item 6. Exhibits |
| | | |
(a). | Exhibits: | | |
| | | | |
| | | | |
| | | | |
| | Exhibit 31.1 | - | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | | |
| | Exhibit 31.2 | - | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | | |
| | Exhibit 32.1 | - | Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | | |
| | | | |
| | Exhibit 101.INS | - | XBRL Instance Document |
| | | | |
| | Exhibit 101.SCH | - | XBRL Taxonomy Extension Schema |
| | | | |
| | Exhibit 101.CAL | - | XBRL Taxonomy Extension Calculation Linkbase |
| | | | |
| | Exhibit 101.DEF | - | XBRL Taxonomy Extension Definition Linkbase |
| | | | |
| | Exhibit 101.LAB | - | XBRL Taxonomy Extension Label Linkbase |
| | | | |
| | Exhibit 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
| | | | |
The following press releases have been issued by the Company during the Company’s three months 2014, which are available on the Company’s website (www.wellsgardner.com) under its Investor Information section:
DATE | TITLE |
| | |
02/13/14 | WELLS-GARDNER REPORTS 2013 YEAR-END FINANCIAL RESULTS |
| | |
05/08/14 | WELLS-GARDNER REPORTS FINANCIAL RESULTS FOR THE FIRST QUARTER 2013 |
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 14, 2014 | By: | 
|
| | | | James F. Brace |
| | | | Executive Vice President, |
| | | | Chief Financial Officer, |
| | | | Treasurer & Corporate Secretary |
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