WELLS-GARDNER
ELECTRONICS CORPORATION
1995
ANNUAL REPORT
COMPANY PROFILE
Wells-Gardner Electronics Corporation is an ISO 9001 video products company
that designs and manufactures color and monochrome video monitors for sale to
the gaming, industrial and commercial markets. It has a customer base that is
growing both domestically and internationally. Included are makers of coin-
operated video games, lottery terminals, video slot machines, video walls and
presentation monitors, automotive diagnostic and test equipment, kiosk, medical
instruments, industrial process control equipment and computer and word
processing terminals. From time to time, the company also engages in contract
manufacturing of electronic products designed and marketed by others.
The company's game plan is to focus on market segments where its willingness
and ability to semi-customize products, quick response time and quality of
service differentiate it from its competition. In turn, these strategies
enable the company to establish defensible market niches.
Founded in 1925, Wells-Gardner is a publicly traded company and maintains
its headquarters in Chicago, Illinois.
COMMON SHARE MARKET PRICE AND DIVIDENDS
The company's common shares are traded on the American Stock Exchange (AMEX)
under the symbol of WGA. On December 31, 1995, there were 862 holders of
record of the company's common shares.
No dividends were paid in 1995 or 1994. High and low sales prices by quarter
on the AMEX for the last two years were:
1995 1994
Prices Prices
High Low High Low
Quarter ended:
March 31, 5.7500 2.5625 4.6250 3.5000
June 30, 5.2500 3.3750 4.1250 3.1250
September 30, 6.5000 4.2500 3.8750 2.6250
December 31, 4.7500 2.8750 3.8125 2.5000
On the cover: Wells-Gardner introduces Videostax(registered trademark), a
stackable 25 inch CRT color monitor that delivers the ultimate image for retail
mall displays, trade show applications, airports and information displays (also
available in 27 inch).
SELECTED FINANCIAL HIGHLIGHTS
Years ended December 31,
(In thousands except per-share data)
1995 1994 1993 1992 1991
Earnings Data:
Net sales $28,301 $33,435 $36,011 $48,949 $38,814
Operating earnings (loss)
excluding special charges &
sale of fixed assets (416) (498) (2,126) 1,606 (644)
Special charges (886) (1,201) - - -
Gain on sale of fixed assets 358 - - - -
Earnings (loss) from
continuing operations (1,059) (1,735) (1,881) 1,017 (1,464)
Earnings from extraordinary item...
tax effect of loss carryforward - - - 528 -
Cumulative effect of change
in accounting principle - - 102 - -
Net earnings (loss) $(1,059) $(1,735) $(1,779) $1,545 $(1,464)
Per-Share Data:
Earnings (loss) from $(0.26) $(0.45) $(0.49) $0.26 $(0.39)
continuing operations
Earnings from extraordinary item...
tax effect of loss carryforward - - - 0.14 -
Cumulative effect of change
in accounting principle - - 0.03 - -
Net earnings (loss) $(0.26) $(0.45) $(0.46) $0.40 $(0.39)
Balance Sheet Data:
Inventory 8,930 5,831 6,989 11,570 7,839
Working capital 10,213 7,561 9,510 11,465 10,363
Total assets 16,570 15,619 16,085 20,189 16,546
Long-term debt 3,125 - - - -
Shareholders' equity 9,633 10,367 12,108 13,785 12,142
Transfer Agent and Registrar: Harris Trust and Savings Bank, 111 West Monroe
Street, Chicago, Illinois 60690
Corporate Attorney: McDermott, Will & Emery, 227 West Monroe Street, Chicago,
Illinois 60606
Corporate Auditor: KPMG Peat Marwick LLP, 303 East Wacker Drive, Chicago,
Illinois 60601
Investment Bankers: Mesirow Financial, 350 North Clark Street, Chicago,
Illinois 60610
The company will make available to shareholders, without charge, a copy of
its 1995 Annual Report on Form 10-K, without exhibits, upon written request
directed to Richard L. Conquest, Chief Financial Officer, Wells-Gardner
Electronics Corporation, 2701 North Kildare Avenue, Chicago, Illinois 60639.
Annual Shareholders Meeting: April 23, 1996, 2:00 P.M. at 2701 North Kildare
Avenue, Chicago, Illinois 60639.
TO OUR SHAREHOLDERS, CUSTOMERS, SUPPLIERS AND EMPLOYEES
Although we are disappointed in Wells-Gardner's 1995 results, we remain
encouraged by several positive accomplishments, including improvements in
quality, cost control and productivity, significant increases in our backlog
and an expanding market share in nearly all of the segments we serve. Our
optimism for 1996 is undiminished.
Wells-Gardner's 1995 top and bottom lines suffered from two major factors:
* WE TOOK A THIRD-QUARTER CHARGE OF $886,000 AGAINST REVENUE TO SETTLE
A WARRANTY ISSUE ON MONITORS SOLD TO A MAJOR CUSTOMER FROM 1991 TO 1993.
The good news is that we have retained this customer, which has grown to
become one of our top three.
* TWO OF OUR MAJOR MARKET SEGMENTS - AMUSEMENT AND VIDEO LOTTERY - HAD
VERY POOR YEARS. Experts estimate industry-wide sales to the coin-operated
amusement market was down around 50%, largely because few "exciting" games
were introduced during the year. Wells-Gardner's sales, however, were only
about 19% lower than the previous year's. Video lottery sales also declined
substantially compared with the previous year, largely because of a weak
second phase in the Loto-Quebec rollout.
WE GAINED MARKET SHARE ANN ENTERED NEW MARKETS
On a positive note, Wells-Gardner gained market share virtually across the
board due to successful launches of new products and aggressive marketing.
The company made substantial inroads in four market segments:
* CASINO GAMING, sales surged 237% with expansion into new markets
* BARTOP MARKET, sales swelled 210% on the strength of new products
* LEISURE AND FITNESS, sales climbed 42% due to the release of our new 27-inch
VGA monitor
* WELLS-GARDNER'S SERVICE GROUP increased sales by 113% with entry into the
market for refurbished monitors
In 1995's fourth quarter, we also entered the high-growth video-wall,
presentation and transportation monitor markets with a full product line and
a vigorous advertising campaign. Wells-Gardner scored a slam-dunk at London's
international ATE show in January 1996 when an Irish customer bought our 16-
monitor video-wall display only one hour after the show opened. We also
delivered our first significant order of transportation monitors to a major
U.S. international airport during the first quarter 1996.
WE OPERATED THE COMPANY MORE PROFITABLY AND EFFICIENTLY
Wells-Gardner operated more profitably in 1995 by reducing our operating loss
by $82,000 to a loss of $416,000 in 1995 from a loss of $498,000 in 1994. This
was in spite of a reduction in sales of $5.1 million to $28.3 million in 1995
from $33.4 million in 1994. This means that the company operated more
efficiently and profitably by approximately $1.2 million.
Manufacturing productivity this past year climbed 32% over 1994, saving the
company $819,000 in improved manufacturing costs, which was the main contributor
to the $1.2 million improvement in efficiency.
QUALITY CONTINUES TO IMPROVE
Quality continued its marked improvement with Wells-Gardner passing the 1995
annual quality audit conducted by the ISO accreditation agency. We reduced
minor violations to a mere three, compared to seven when the accreditation
was obtained in 1994 (up to 15 minors are permitted).
Our process reject rate was also cut below 9% in December 1995. This compares
to 20% when the statistics were first recorded in April 1994 and we ended the
year at a quality coefficient at over 90, compared to an average 74.9 in 1994
and 85.2 in 1995.
THE OUTLOOK FOR 1996
After a poor performance in 1995, we do have reason to be optimistic for 1996.
1995's year-end backlog surged to more than 50,000 monitors, equivalent to
nearly six months of sales, and 150% larger than year-end 1994's level. This
was partly caused by 10 of our largest 20 customers delaying shipments in the
fourth quarter 1995 and scheduling them for the first and second quarters 1996.
Our experience is that significantly more than 90% of backlog results in
revenue.
Spending on R&D rose to 5.3% of sales in 1995 from 4.2% in 1994. We regard this
as an investment in our future and it allowed us to release eight new products
last year. It's important to note that all of these new products are voltage-
free, which means that they can be plugged in anywhere in the world from Topeka
to Tokyo to Timbuktu.
The company also negotiated its first long-term banking agreement in 17 years
with Harris Trust and Savings Bank, which, we feel is another third-party
endorsement of our prospects.
We thank everyone for their faith in Wells-Gardner and its products. We think
the year 1996 will find that faith well-placed.
/s/ ANTHONY SPIER
Anthony Spier
Chairman of the Board, President
and Chief Executive Officer
March 15, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1995 COMPARED TO 1994
The company's sales in 1995 were $28,301,000 compared to $33,435,000 in
1994, a decrease of $5,134,000, or 15 percent. The decrease was attributed to
lower demand in our two largest segments, video lottery terminals and coin-
operated amusement machines. Sales of video lottery terminal monitors decreased
52 percent, or $5,164,000, due mainly to the lower demand from the Quebec video
lottery. There was a decrease of 19 percent, or $2,534,000, in the coin-
operated amusement machines. Although there was significant gain in the bartop
segment of the coin-operated amusement machine markets, this did not make up the
short-fall in the coin-operated arcade and amusement poker segments. The
decline in 1995 sales would have been much greater if there had not been a 76
percent increase in the casino, leisure/fitness and service areas. Sales to
these segments in 1995 were $6,709,000 compared to $3,803,000 in 1994. Sales to
the automotive test and diagnostic equipment and data display segments were
down 14 percent due to industry consolidation, economic cyclical trends and
some movement to PC-based equipment. Those segments accounted for 12 percent
of total sales in 1995.
The company's 1995 operating loss, excluding special charges, was $416,000,
or 10 cents per share, down from a loss of $498,000, or 13 cents per share, in
1994. The net loss in 1995 declined to $1,059,000, or 26 cents per share, from
1994's net loss of $1,735,000, or 45 cents per share. The net loss in 1995
included a gain on the sale of assets of $358,000, or 9 cents per share and a
special charge for warranty of $886,000, or 22 cents per share. The 1994 net
loss included a special charge of $1.2 million, or 31 cents per share, for
management reorganization and the cost associated for phasing out certain
products that have been replaced by our new U-series monitor lines.
Gross profit in 1995 decreased to $2,342,000, or 8.3 percent of sales,
compared to $2,582,000 or 7.7 percent of sales in 1994. This decrease of
$240,000, or 9 percent was attributable to the lower sales volume.
Selling and administrative expenses for 1995 were down 10 percent compared
to 1994. This decrease was due mainly by eliminating certain selling costs and
the commissions paid on the lower sales volumes.
In 1995, other expense, net, increased to $115,000, compared to $36,000 in
1994, due mainly to the increase of $45,000 in interest expense on our banking
obligation and a decrease of $23,000 from investment income. The company also
had a gain of $358,000 on the sale of a 63,000 square foot building.
Accounts receivable at the end of 1995 decreased $2,565,000, or 42 percent,
to $3,540,000, compared to $6,105,000 at the end of 1994. This decrease is due
to lower sales volume in the fourth quarter of 1995.
The company's 1995 year-end inventory increased 53 percent to $8,930,000
compared to $5,831,000 in 1994. This increase is a result of 10 of our 20
largest customers delaying their shipments from the fourth quarter of 1995 to
the first and second quarters in 1996. The number of inventory turns in 1995
was 3.78 compared to 4.81 in 1994.
In 1995, the company signed a three year, $7,000,000, credit agreement with
Harris Trust and Savings Bank. This agreement provides the company with funds
to support the necessary working capital for operations and capital for
developing products to expand in other marketing segments. At the end of 1995,
the company's long-term borrowing was at $3,125,000, as compared to $1,925,000
in short-term borrowing at the end of 1994. The borrowing was primarily for
funding working capital, particularly for financing increased inventory at year-
end to support customer orders scheduled for shipment in the first quarter of
1996.
The company's debt-to-equity ratio increased to 32 percent at December 31,
1995, from 19 percent at December 31, 1994, as a result of a 62 percent increase
in borrowing. Capital expenditures in 1995 totaled $346,000 compared to
$683,000 in 1994.
Corporate working capital increased $2,652,000, or 35 percent, to
$10,213,000 compared to $7,561,000 in 1994. The current ratio remains a strong
3.7 to 1.0 compared to 2.4 to 1.0 in 1994.
1994 COMPARED TO 1993
The company's sales in 1994 decreased 7 percent, or $2,576,000, to
$33,435,000, compared to $36,011,000 in 1993. This decrease was attributed to
lower demand in most of our traditional market segments, particularly coin-
operated arcade games, offset by a 128 percent increase in one of our newer
segments, video lottery terminals. The video lottery segment contributed an
additional $4,252,000 to sales, while coin-operated arcade games, our largest
market segment, decreased 26 percent or $6,323,000. The increase in video
lottery sales resulted from the Quebec video lottery, in which we received 100
percent share of that order from three of our major customers. On the other
hand, coin-operated arcade games sales declined due to a lack of popular games
being introduced in 1994 and start-up problems with one of our monitors from our
new U-series monitor line. This problem was corrected during the first quarter
of 1995, and we do not anticipate future problems with this new series of
monitors. In our other traditional market segments, automotive test and
diagnostic equipment and leisure fitness equipment, sales declined 9 percent or
$486,000, to $4,753,000, compared to $5,239,000 in 1993. Most of this decline
was in the automotive test and diagnostic equipment, due to industry
consolidation and the movement to PC-based equipment.
The company's 1994 loss was $1,735,000, or 45 cents per share, and included
a special charge of $1,201,000, or equivalent to 31 cents per share, for
management reorganization and the cost associated for phasing out certain
products that have been replaced by our new U-series monitor lines. Last
year's loss of $1,779,000, or 46 cents per share, includes a tax benefit of
$235,000 or 6 cents per share, and a positive effect of an accounting change of
$102,000, or 3 cents per share. In 1993, the company also took a $540,000, or
14 cents per share, warranty charge to settle a picture tube reliability issue
with a major customer.
Despite a 7 percent decline in 1994 sales, gross operating profit
increased to $2,582,000, or 7.7 percent of sales, compared to $1,536,000, or
4.3 percent of sales in 1993. This improved operating profit reflects stringent
cost-cutting efforts achieved in 1994.
Selling and administrative expenses for 1994 continued to decline, down
16 percent compared to 1993. This decrease also reflects the stringent cost-
cutting efforts achieved in 1994, and the lower sales commissions paid on the
lower sales volumes.
In 1994, other expense, net, increased to $36,000, compared to 1993,
whereas other income, net, was $10,000 of income. This difference was due
mainly to lower investment income, and included the recovery of bad debt in 1993
which did not occur in 1994.
Accounts receivable at the end of 1994 increased $425,000, or 7 percent,
to $6,105,000, compared to $5,680,000 in 1993. This increase is due to longer
terms being extended in the market place, to match competition, higher export
sales volume, and the increase in the number of days outstanding. Accounts
receivable turnover in 1994 declined to 5.67, compared to 6.83, in 1993.
The company's 1994 year-end inventory was down significantly, decreasing 17
percent or $1,158,000, to $5,831,000, compared to year-end 1993 of $6,989,000.
This was a result of the continuing inventory management improvement and the
on-going efforts to standardize products offered to our various market segments.
The number of inventory turns in 1994 improved 27 percent to 4.81, compared to
3.72 in 1993.
Short-term borrowing increased to $1,925,000 at December 31, 1994, compared
to $1,200,000 at December 31, 1993. This increase in borrowing was primarily
for funding working capital, an economical buy of picture tubes with favorable
pricing and the financing of approximately $650,000 of completed monitors
purchased offshore. This purchase of monitors was in anticipation of a new
release of orders from the Quebec lottery, which did not materialize until the
first quarter of 1995.
The company's debt-to-equity ratio increased to 19 percent at December 31,
1994, from 10 percent at December 31, 1993, as a result of a 60 percent increase
in short-term borrowing, a 20 percent increase in accounts payable and a 14
percent decrease in equity. Capital expenditures in 1994 totaled $683,000
compared to $617,000 in 1993.
Corporate working capital decreased $1,949,000, or 20 percent, to
$7,561,000, compared to $9,510,000 in 1993. The current ratio was a strong
2.4 to 1, compared to 3.4 to 1 in 1993.
BALANCE SHEETS
ASSETS
December 31,
1995 1994
Current Assets:
Cash and cash equivalents $ 1,116,630 $ 57,376
Accounts receivable, net of allowances
of $297,866 in 1995, and $217,647 in 1994 3,540,346 6,105,323
Income tax receivable 62,182 328,427
Inventory (Note 3) 8,929,939 5,831,497
Prepaid expenses and other current assets 374,847 490,920
Total current assets 14,023,944 12,813,543
Property, Plant and Equipment:
Buildings and improvements 3,373,101 3,845,815
Machinery and equipment 5,723,530 5,538,696
9,096,631 9,384,511
Accumulated depreciation (6,825,212) (6,924,813)
2,271,419 2,459,698
Land 274,267 346,164
Property, plant and equipment, net 2,545,686 2,805,862
Total assets $16,569,630 $15,619,405
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
1995 1994
Current Liabilities:
Note payable (Note 8) $ --- $ 1,925,000
Accounts payable 3,076,777 1,922,624
Accrued expenses (Note 7) 634,528 1,234,307
Accrued warranty 99,906 170,535
Total current liabilities 3,811,211 5,252,466
Long-Term Liabilities:
Note payable (Note 8) 3,125,000 ---
Total liabilities 6,936,211 5,252,466
Shareholders' Equity:
Common shares
$1 par value, 25,000,000 shares authorized;
4,052,676 shares issued and outstanding
at December 31, 1995
3,957,736 shares issued and outstanding
at December 31, 1994 4,052,676 3,957,736
Capital in excess of par value 1,096,892 959,545
Retained earnings 4,754,851 5,814,158
Unearned compensation (271,000) (364,500)
Total shareholders' equity 9,633,419 10,366,939
Total liabilities and
shareholders' equity $16,569,630 $15,619,405
See accompanying notes to financial statements
STATEMENTS OF OPERATIONS
Year Ended December 31,
1995 1994 1993
Net sales $28,300,514 $33,435,447 $36,010,807
Cost and expenses:
Cost of sales 25,958,265 30,853,367 34,474,558
Selling and administrative
expenses 2,758,444 3,080,301 3,662,234
Other (income) expense,
net (Note 6) 114,886 35,671 (9,682)
Gain on sale of fixed assets (357,774) --- ---
Special charge (Note 9) 886,000 1,200,738 ---
29,359,821 35,170,077 38,127,110
Loss before income taxes (1,059,307) (1,734,630) (2,116,303)
Income tax benefit (Note 4) --- --- (235,000)
Loss before cumulative effect
of change in accounting principle (1,059,307) (1,734,630) (1,881,303)
Cumulative effect of change in
accounting principle --- --- 101,984
Net loss $(1,059,307) $(1,734,630) $(1,779,319)
Per-Share Data:
Loss before cumulative effect
of change in accounting principle $ (0.26) $ (0.45) $ (0.49)
Cumulative effect of change in
accounting principle --- --- 0.03
Net loss $ (0.26) $ (0.45) $ (0.46)
Weighted average common and
common equivalent shares
outstanding 4,015,717 3,882,964 3,840,211
STATEMENTS OF SHAREHOLDERS' EQUITY
Capital in Total
Common excess of Retained Unearned shareholders
shares par value earnings compensation equity
Balance,
December 31,1992 $3,833,784 $ 739,397 $9,328,107 $(116,670) $13,784,618
Net loss --- --- (1,779,319) --- (1,779,319)
Stock options exercised 42,325 82,760 --- --- 125,085
Stock repurchased and
retired (16,167) (64,211) --- --- (80,378)
Amortization of unearned
compensation --- --- --- 58,335 58,335
Balance,
December 31,1993 $3,859,942 $ 757,946 $7,548,788 $(58,335) $12,108,341
Net loss --- --- (1,734,630) --- (1,734,630)
Issuance of stock awards 102,000 262,500 --- (364,500) ---
Stock options exercised 17,500 34,063 --- --- 51,563
Cancellation of stock
awards (21,706) (94,964) --- 58,335 (58,335)
Balance,
December 31,1994 $3,957,736 $ 959,545 $ 5,814,158 $(364,500) $10,366,939
Net loss --- --- (1,059,307) --- (1,059,307)
Stock options exercised 116,210 243,154 --- --- 359,364
Stock repurchased and
retired (21,270) (105,807) --- --- (127,077)
Amortization of unearned
compensation --- --- --- 93,500 93,500
Balance,
December 31,1995 $4,052,676 $1,096,892 $ 4,754,851 $(271,000) $9,633,419
See accompanying notes to financial statements
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1995 1994 1993
Cash flows from operating activities:
Net loss $(1,059,307) $(1,734,630) $(1,779,319)
Adjustments to reconcile net loss to
cash provided by operating activities:
Depreciation and amortization 489,432 463,884 430,078
Net (gain) loss on sale of fixed assets (357,774) (13,115) 1,005
Amortization (reversal) of unearned
compensation 93,500 (58,335) 58,335
Cumulative effect of change in
accounting principle --- --- (101,984)
Changes in current assets and liabilities:
Income tax receivable 266,245 (87,419) (213,157)
Accounts receivable 2,564,977 (424,843) (817,175)
Inventory (3,098,442) 1,157,360 4,580,699
Prepaid expenses and other current assets 85,322 (8,483) 40,548
Accounts payable 1,154,153 322,806 (2,742,781)
Accrued expenses (765,309) 228,101 405,015
Income taxes payable --- --- (13,135)
Net cash used in operating activities (627,203) (154,674) (151,871)
Cash provided by (used in) investing
activities:
Additions to property, plant and equipment (346,467) (683,077) (616,634)
Proceeds from the disposition of long-term
bond --- 25,000 ---
Proceeds from the disposition of fixed
assets 600,637 --- 58,995
Net cash provided by (used in)
investing activities 254,170 (658,077) (557,639)
Cash provided by financing activities:
Notes payable 1,200,000 725,000 25,000
Proceeds from stock options exercised 359,364 51,563 125,085
Stock repurchased and retired (127,077) --- (80,378)
Net cash provided by financing activities 1,432,287 776,563 69,707
Net increase (decrease) in cash and
cash equivalents 1,059,254 (36,188) (639,803)
Cash and cash equivalents at beginning
of year 57,376 93,564 733,367
Cash and cash equivalents at end of year $ 1,116,630 $ 57,376 $ 93,564
Supplemental cash flows disclosure:
Income taxes paid $ --- $ 108,226 $ 25,000
Interest paid $ 164,566 $ 119,131 $ 132,492
See accompanying notes to financial statements
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Cash and 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 stated at the lower of cost, determined by the first-in, first-
out (FIFO) method, or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is calculated
on the straight-line method over the estimated useful lives of the assets.
The approximate range of useful lives is as follows:
Buildings.....15-31 1/2 years Machinery & Equipment.....5-15 years
Revenue Recognition
Revenue from sales of products which the company manufactures are recorded at
time of shipment.
Research and Development
Research and development costs for the years ended December 31, 1995, 1994 and
1993 were $1,506,448, $1,392,620, and $1,610,830, respectively, which were 5.3%,
4.2% and 4.5% of annual sales, respectively.
Net Earnings Per Share
Per-share earnings are computed using the weighted average number of common
shares outstanding and give effect to the dilutive effect of stock options,
where appropriate. The weighted average number of common and common-equivalent
shares for the years 1995, 1994 and 1993 were 4,015,717, 3,882,964, and
3,840,211, respectively.
Income Taxes
Effective January 1, 1993, the company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" and has reported
the cumulative effect of that change in the method of accounting for income
taxes in the 1993 statement of operations.
Financial Instruments
The fair value of the company's financial instruments does not materially
vary from the carrying value of such instruments.
Use of Estimates
Management of the company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Reclassifications
Where appropriate, certain items relating to the prior years have been
reclassified to conform to the presentation in the current year.
(2) NATURE OF BUSINESS
The company's primary business is the assembly of electronic components
which consist of video color monitors, data display monitors and bonding of
touch panels. Monitor and data display sales during the period 1995 to 1993
were made through a sales representative firm (James Industries Inc.) whose
Chairman of the Board 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, 1995, 1994 and 1993 were approximately
$868,000, $1,047,000 and $1,292,000, respectively. Commissions owed to James
Industries Inc. as of December 31, 1995, 1994 and 1993 were approximately
$103,000, $170,000 and $214,000 respectively. Total commissions as a percentage
of sales for the years ended December 31, 1995, 1994 and 1993 were 3.07%, 3.13%
and 3.59%, respectively. Sales to James Industries Inc. for the years ended
December 31, 1995, 1994 and 1993 were approximately $425,000, $2,216,000 and
$2,104,000, respectively. Outstanding accounts receivable due from James
Industries Inc. at December 31, 1995, 1994 and 1993 were $33,000, $535,195 and
$286,869, respectively.
The company had derived 15%, 19% and 15% of total revenue from WMS
Industries, respectively, during 1995, 1994 and 1993. In 1993, the company had
derived 11% of total revenue from Dynamo Corporation. Sales to customers in
foreign countries were 20.1%, 20.0%, and 14.2% in 1995, 1994 and 1993
respectively.
(3) INVENTORY
At December 31, 1995 and 1994, inventory consisted of the following components:
1995 1994
Raw materials $ 5,561,981 $ 3,464,327
Work in progress 435,324 434,901
Finished goods 2,932,634 1,932,269
Totals $ 8,929,939 $ 5,831,497
(4) INCOME TAXES
The income tax provision (benefit) consisted of the following components for
1995, 1994 and 1993:
1995 1994 1993
Current Federal $ --- $ --- $(188,000)
Deferred Federal --- --- ---
Current State --- --- (47,000)
Deferred State --- --- ---
$ --- $ --- $(235,000)
The provision (benefit) is classified in the statements of operations as
follows:
1995 1994 1993
Operations $ --- $ --- $(235,000)
Extraordinary item -
utilization of loss carryforward --- --- ---
$ --- $ --- $(235,000)
The effective income tax rates for 1995, 1994 and 1993 differed from the
expected Federal income tax rate (34%) for the following reasons:
1995 1994 1993
Computed expected tax (benefit) $(360,000) $(590,000) $(720,000)
State income taxes (benefit)
net of Federal tax effect (52,000) (86,000) (47,000)
Other, net 6,000 36,000 1,000
Limitations on the utilization
of tax benefits 406,000 640,000 531,000
$ --- $ --- $(235,000)
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by income tax regulations. Temporary differences which gave
rise to deferred tax assets and liabilities at December 31, 1995 and 1994
consisted of:
1995 1994
Deferred tax assets:
Allowance for doubtful
accounts $ 115,000 $ 84,000
Warranty reserve 39,000 66,000
Inventory reserve 273,000 308,000
Restructure reserve --- 154,000
Deferred compensation 36,000 ---
Contributions carryovers 9,000 ---
Net operating loss 1,332,000 763,000
carryforwards
Alternative minimum tax credit 50,000 43,000
carryforwards
General business credit 129,000 59,000
carryforwards
Other 10,000 7,000
Total gross deferred tax assets 1,993,000 1,484,000
Less valuation allowance (1,798,000) (1,248,000)
Net deferred tax assets 195,000 236,000
Deferred tax liabilities:
Property, plant & equipment,
principally depreciation 195,000 236,000
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, 1995 was
an increase of $550,000 primarily due to additional net operating loss
carryforwards. At December 31, 1995, the company has net operating loss
carryforwards for Federal income tax purposes of approximately $3,450,000
which are available to offset future Federal taxable income, if any, through
2010. The company also has alternative minimum tax credit carryforwards of
approximately $50,000 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 2007.
(5) STOCK PLANS
The company maintains a Non-qualified Option and Stock Award Plan under which
officers and key employees may acquire up to a maximum of 1,400,000 common
shares. This plan currently expires December 31, 2005. Options may be granted
at 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. As of
December 31, 1995, 60 persons were eligible to participate in the plan and 33
persons held outstanding options for an aggregate of 277,411 shares with an
average per share option price of $3.38. Such options expire on dates ranging
from September 17, 1996 to January 6, 2005. A summary of the information and
activity of the stock option plan is shown below:
Outstanding options
Number of Price range Aggregate
shares per share price
Balance at December 31, 1992 $ 250,128 $ 2.875 - 16.500 $ 1,001,831
Options granted --- --- ---
Options forfeited (10,000) 3.000 - 16.500 (61,698)
Options exercised (42,325) 2.875 - 5.375 (125,085)
Balance at December 31, 1993 197,803 2.875 - 16.500 815,048
Options granted 27,500 3.500 - 3.750 101,250
Options forfeited (11,482) 2.875 - 16.500 (54,087)
Options exercised (17,500) 2.875 - 3.000 (51,563)
Balance at December 31, 1994 196,321 2.875 - 5.375 810,648
Options granted 221,300 2.750 608,575
Options forfeited (24,000) 2.750 - 5.375 (122,434)
Options exercised (116,210) 2.750 - 3.750 (359,364)
Balance at December 31, 1995 $ 277,411 $ 2.750 - 5.375 $ 937,425
(6) OTHER (INCOME) EXPENSE, NET
Other (income) expense, net consisted of the following:
Year Ended December 31,
1995 1994 1993
Interest expense, net $ 164,566 $ 119,131 $ 132,492
Other income, net (49,680) (83,460) (142,174)
Net other (income) expense, net $ 114,886 $ 35,671 $ (9,682)
(7) ACCRUED EXPENSES
Accrued expenses are composed of the following:
December 31,
1995 1994
Payroll $ 66,376 $ 64,264
Taxes other than on income 124,791 142,481
Sales commissions 102,809 169,513
Insurance 176,922 135,573
Other accrued expenses 163,630 20,155
Special charge --- 702,321
Total $ 634,528 $1,234,307
(8) NOTE PAYABLE
The note payable consisted of a revolving line of credit balance of $3,125,000
and $1,925,000 at December 31, 1995 and 1994, respectively, bearing interest
at prime (8.50% at December 31, 1995 and 1994). During 1995, the company
entered into a new long-term banking agreement with Harris Trust and Savings
Bank for a $7,000,000 revolving line of credit. This agreement runs through
September 30, 1998. At December 31, 1995 the company had an unused balance of
$3,875,000 on its line of credit. During 1995, the average rate for the
borrowings was 8.77%. The long-term note is uncollateralized with certain
covenant restrictions.
(9) SPECIAL CHARGE
During 1995, the company incurred a one time charge of $886,000, or 22 cents
per share. This charge related to a warranty issue on monitors shipped to a
major customer from 1991 to 1993. This charge covered all contingent
liabilities which expired December 31, 1995. During 1994, the company incurred
a one time charge of $1,201,000, or 31 cents per share. This charge consisted
of $762,000, or 20 cents per share for management reorganization and $439,000,
or 11 cents per share for phasing out certain products and severance payments
for employee reorganization which consisted of terminating 19 employees. This
reorganization was substantially completed at December 31, 1994.
(10) IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standard No. 121 ("Statement 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", requires that long-lived assets and certain identifiable
intangibles of an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The company is required to comply with Statement 121 in fiscal
year 1996 and estimates that its adoption will not have a material effect on
the financial statements.
Statement of Financial Accounting Standard No. 123 ("Statement 123")
"Accounting for Stock-Based Compensation", will be implemented for the
company's 1996 fiscal year. As allowed by the new Statement, the company
plans to continue to use Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" in accounting for its stock options.
Certain pro forma and other information will be disclosed as if the company had
measured compensation costs in a manner consistent with the new Statement.
Management has reviewed the Statement and expects that its provisions will
not have a material adverse effect on the financial condition or results of
operations of the company.
(11) UNAUDITED QUARTERLY FIANCIAL DATA
Selected quarterly data for 1995 and 1994 are as follows:
(In thousands except per-share data)
1995 1994
First Second Third Fourth First Second Third Fourth
Net sales $6,157 $7,784 $7,842 $6,518 $7,622 $8,597 $8,943 $8,273
Net earnings (loss) $ 148 $ 149 $(742) $(614) $(1,265) $(651) $ 112 $ 69
Net earnings (loss)
per share $ 0.04 $ 0.03 $(0.18) $(0.15) $(0.33) $(0.17) $ 0.03 $ 0.02
INDEPENDENT AUDITORS' REPORT
KPMG Peat Marwick LLP
The Board of Directors
Wells-Gardner Electronics Corporation:
We have audited the accompanying balance sheets of Wells-Gardner Electronics
Corporation as of December 31, 1995 and 1994 and the related statements of
operations, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1995. 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, 1995 and 1994, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in note 1 to the financial statements, effective January 1,
1993, the company changed its method of accounting for income taxes.
/s/ KPMG PEAT MARWICK LLP
Chicago, Illinois
February 16, 1996
ALBERT S. WELLS, JR.
TO RETIRE FROM THE BOARD OF DIRECTORS
Albert S. Wells, Jr., 75, who has served the company that bears his family's
name for more than half a century, will retire from Wells-Gardner's Board of
Directors following the election of directors at this year's annual meeting,
April 23, 1996. Al has been a Board member for more than 47 years and, before
retiring from active employment in 1990, had served as Chairman of the Board,
Chief Executive Officer, President and Chief Operating Officer.
Al joined the company in 1941, as a buyer and expediter in the purchasing
department. In 1942, he enlisted in the United States Air Force and began as
an instructor in the troop carrier command. He ended his military career as a
pilot and spent over a year and a half in the South Pacific.
During his total of more than 55 years with Wells-Gardner, Al has always set
the highest standards of conduct and performance, both for himself and those
with whom he worked. He has gained the unqualified respect of peers, customers
and suppliers alike. In 1990, the Board of Governors of the Electronics
Industry Association (EIA) voted Al an honorary membership in the EIA for his
distinguish service and outstanding leadership.
It is with mixed emotions that we bid Al farewell. On one hand, he has earned
his retirement, and we wish him the best of luck in his well-deserved break from
the work-a-day world. On the other hand, fellow Board members and all who have
had contact with Al know that his contributions will be missed dearly.
All we can say is....
Thanks, Al. May you meet with as much success in your future endeavors as
you have in the past!
BOARD OF DIRECTORS
Anthony Spier Albert S. Wells, Jr. Allan Gardner
Chairman of the Board, Retired from the Retired from the
President company (1990) company (1988)
and Chief Executive Officer
James J. Roberts, Jr. John R. Blouin Wayne L. Harris
Chairman of the Board President, James Industries, President, Wayne
and Chief Executive Officer, Inc. (Sales representative Harris Company
James Industries, Inc. organization serving the (Appliance
(Sales representative electronics and computer distributor and
organization serving the industries) sales
electronics and computer representative
industries) agency)
William DeNicolo Ernest R. Wish
Founder and Chairman of Director of Revenue
the Board of Telular City of Chicago
Corporation and Chairman
of the Board and President
of DNIC Brokerage Company
OFFICERS
Anthony Spier Richard L. Conquest Randall S. Wells
Chairman of the Board, Vice President of Finance Executive Vice
President and Chief Financial Officer President and General
Chief Executive Officer and Secretary Manager
Larry S. Mahl John S. Pircon Kathleen E. Hoppe
Director of Material Vice President of Marketing Director of
and Engineering Management
Information Systems
Mark E. Komorowski Eugene C. Ahner
Director of Service Director of Human Resources