WELLS-GARDNER ELECTRONICS CORPORATION
1997 ANNUAL REPORT
Corporate Profile
Founded in 1925, Wells-Gardner Electronics Corporation is an ISO 9001
certified video products corporation which designs, manufactures and
assembles color video monitors for the coin-operated video games,
lottery and gaming machines, leisure and fitness, service, automotive
and display markets.
Table of Contents
Selected Financial Data & Common Share Market
Price.................................... 1
President's Report....................... 2
Management's Discussion & Analysis....... 4
Financial Information.................... 6
Notes to Financial Statements............ 9
Independent Auditors'Report.............. 15
Selected Financial Data
Years ended December 31, (In thousands except per-share data)
1997 1996 1995 1994 1993
Earnings Data:
Net sales $42,989 $36,668 $28,301 $33,435 $36,011
Earnings (loss) from operations
excluding special charges, sale of
fixed assets & accounting change $ 1,124 $ 563 $ (375) $ (407) $(2,046)
Special charges --- --- $ (886) $(1,201) ---
Gain on sale of fixed assets --- --- $ 358 --- ---
Cumulative effect of change in
accounting principle --- --- --- --- $ 102
Net earnings (loss) $ 775 $ 403 $(1,059) $(1,735) $(1,779)
Basic Per-Share Data:
Earnings (loss) from continuing
operations $ 0.19 $ 0.10 $( 0.26) $( 0.45) $( 0.49)
Cumulative effect of change in
accounting principle --- --- --- --- $ 0.03
Net earnings (loss) $ 0.19 $ 0.10 $( 0.26) $( 0.45) $( 0.46)
Dilutive Per-Share Data:
Earnings (loss) from continuing
operations $ 0.18 $ 0.10 $( 0.26) $( 0.45) $( 0.49)
Cumulative effect of change in
accounting principle --- --- --- --- $ 0.03
Net earnings (loss) $ 0.18 $ 0.10 $( 0.26) $( 0.45) $( 0.46)
Balance Sheet Data:
Inventory $ 9,257 $ 7,344 $ 8,930 $ 5,831 $ 6,989
Working capital $10,915 $ 9,017 $10,213 $ 7,561 $ 9,510
Total assets $17,520 $14,125 $16,570 $15,619 $16,085
Debt $ 1,800 $ 1,300 $ 3,125 $ 1,925 $ 1,200
Shareholders' equity $11,385 $10,095 $ 9,633 $10,367 $12,108
Common Share Market Price
The company's common shares are traded on the American Stock Exchange
under the symbol WGA. On December 31, 1997, there were approximately 750
holders of record of the common shares. No dividends were paid in 1997
or 1996. High and low sales prices for the last two years were:
1997 Prices 1996 Prices
Quarter ended: High Low High Low
March 31, $4.50 $3.38 $4.25 $2.50
June 30, $4.38 $3.38 $4.88 $3.88
September 30, $6.88 $4.00 $4.63 $3.13
December 31, $7.19 $5.00 $4.50 $3.25
PRESIDENT'S REPORT
TO OUR SHAREHOLDERS, CUSTOMERS, SUPPLIERS AND EMPLOYEES:
We are pleased to report to you that Wells-Gardner reported a profit for
the second consecutive year, a feat not accomplished since 1988. In
addition, the Company reported a profit for 7 of the last 8 quarters,
demonstrating a consistent earnings performance. There continued to be
many positive accomplishments such as improvements in productivity and
quality and the release of a dozen new and exciting products, including
a new non-monitor product.
Strategic Planning For The Future
Your management and Board of Directors have spent considerable effort in
identifying the long term prospects for the Company. New and significant
goals have been established and we are proceeding to implement actions
which will allow us to continue the current trend of increasing sales
volume and profits.
* Key to this strategy is a commitment to be the ``best-in-class''
quality supplier in our served markets. The Company obtained a
further 3 years certification through the year 2000 of the ISO
9001 accreditation. As has been previously mentioned, we were
the first open-frame monitor manufacturer to obtain this quality
certification and it has been a valuable marketing advantage in
selling to several highly prestigious accounts. During 1997 we
employed a very experienced Director of Quality, who is working
with our consultants to lead the effort with increased training
of our production and engineering personnel and the linking of
quality and price with our key electronics vendors. We are
extremely pleased with the results thus far.
* Even though our plans provide for significant internal growth
within our existing businesses, we recognize the need to enter
other growth markets, probably through the acquisition of
another Company. Our goal is to reach one hundred million
dollars in sales by December 31, 2000! The motto which we have
adopted is ``100 by 2000.''
Wells-Gardner Released 12 New Products In 1997
In 1995, the Company embarked upon a strategic program of releasing new
products at the rate of approximately one per month. In the last 3
years, Wells-Gardner has brought a total of 32 new products to market,
of which 12 were released in 1997. The Company has implemented a
strategic initiative to use offshore engineering groups as a significant
resource in research and development. Management's policy is to develop
new products from marketing specification to release to the market,
including comprehensive beta-site and design verification testing within
12 months, which has been reduced from 36 months in 1994.
The new products included the release of the new WG2 line of high value
monitors manufactured offshore, the new generation of large size
standard resolution and medium resolution monitors, the new high value
VGA monitors, the 33'' VGA product and the new Presentation Monitor.
Approximately 94 percent of 1997 revenues were derived from the 32 new
products released since January 1995.
Operations Improve Again in 1997
Net earnings almost doubled to 19 cents per share from 10 cents in 1996.
This represents the fourth consecutive year of improved profitability.
Also 1997 sales were $43.0 million up 17% from 1966 and up 52% over the
1995 sales level with the growth being derived from almost all market
segments. In addition, we have set the stage for further margin
improvements through our release of new products during the year.
Our balance sheet remains strong. The current ratio improved 3:52 to 1
with inventory turns declining slightly to 3.93 from 4.28 in 1996.
Although receivable days outstanding increased to 52 days, we still out-
performed industry averages. Your shareholder equity improved to $2.70.
Letter Of Intent To Acquire Data Ray Corporation
On February 18, 1998 Wells-Gardner announced that it had signed a letter
of intent to acquire 100 percent of Data Ray Corporation of Westminster,
Colorado for cash. Data Ray Corporation is the number 1 manufacturer of
medical monitors in the Unites States with estimated sales of about $25
million. Wells-Gardner's annual sales for a full year will increase by
58 percent to about $68 million. We anticipate closing this transaction
by the end of April, 1998.
This is a key step to implement our strategy of ``100 by 2000." We also
anticipate making further acquisitions in the medical market in the
future.
On a personal note, I would like to note the retirement of Allan Gardner
in August 1997 from your Board of Directors. All of us will miss his
special and unique contribution to the Company that bears his name.
We thank all of you for your continued support as we embark on our
course to meet our strategic goals for the year 2000 and beyond.
Anthony Spier
Chairman of the Board, President
and Chief Executive Officer
March 13, 1998
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION &
RESULTS OF OPERATIONS
Results of Operations
The following table sets forth the percentage of net sales represented
by each line item presented in the Company's Statements of Operations as
of December 31.
Percent of Net Sales
1997 1996 1995
Net Sales...................... 100.0% 100.0% 100.0%
Cost of Sales.................. 84.2% 84.4% 86.3%
Gross Profit................... 15.8% 15.6% 13.7%
Engineering, Selling &
Administrative................ 13.2% 14.1% 15.1%
Operating Income (Loss)........ 2.6% 1.5% (1.4%)
Other Expense (net)............ .8% .4% .5%
Gain on Sale of Fixed Assets... --- --- (1.3%)
Special Charge................. --- --- 3.1%
Net Earnings (Loss)............ 1.8% 1.1% (3.7%)
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales increased 17.2% to $42,989,000 in 1997 compared to $36,668,000
in 1996. The 1997 increase was attributed to sales growth primarily in
the gaming and service segments and the release of 12 new products
during the year.
Gross profit for 1997 was $6,801,000 or 15.8% of sales compared to
$5,721,000 or 15.8% of sales in 1996. Gross margin improved for the
fourth consecutive year as the Company introduced the WG2 line of high
value monitors manufactured in Asia and the release of new products.
Engineering, selling and administrative expenses decreased .9% of sales
to $5,677,000 in 1997 compared to $5,158,000 in 1996. The 1997 results
include an increase in the Company's provision for doubtful accounts by
$154,000 to fully reserve for a customer in financial difficulties and
additional sales commissions paid on the increased sales volume. The
percentage decrease is reflective of the Company's continued focus on
increasing net sales without adding proportionate overhead expenses.
Operating income for 1997 was $1,124,000 compared to $563,000 in 1996,
an increase of 99.6%. Other expense (net) increased to $339,000 in 1997
compared to $160,000 in 1996. The Company recorded an income tax
provision of $10,000 in 1997, but did not record an income tax expense
for 1996 due to the Company's utilization of its net operating loss
carryforward. As of December 31, 1997, the Company has available a net
operating loss carryforward of approximately $2.44 million.
As of December 15, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, ``Earnings Per Share'' and
restated previously reported earnings per share as required. Statement
No. 128 simplifies the standards for computing earnings per share. It
replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. It also requires dual
presentation of basic and diluted earnings per share on the face of the
income statement and requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the numerator
and denominator of the diluted earnings per share computation. Also,
during 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, ``Comprehensive Income.'' Statement No. 130
establishes standards for the reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses). This
Statement requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. These new accounting standard
only affects financial statement presentation and will not have a
material impact on the Company.
Net income for 1997 was $775,000 compared to $403,000 in 1996, an
increase of 92.3%. For 1997, basic earnings per share were 19 cents and
diluted earnings per share were 18 cents, whereas 1996 reported basic
and diluted earnings per share of 10 cents.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales increased 29.6% to $36,668,000 in 1996 compared to $28,310,000
in 1995. The 1996 increase was attributed to additional sales to the
amusement, display, INTRANET, leisure/fitness and service segments.
Gross profit for 1996 was $5,721,000 or 15.6% of sales compared to
$3,890,000 or 13.7% of sales in 1995. The increase in gross profit from
1996 to 1995 was attributed to increased sales volume, manufacturing
efficiencies and the Company's ongoing focus on cost reductions.
Engineering, selling and administrative expenses decreased 1.0% of sales
to $5,158,000 in 1996 compared to $4,265,000 in 1995. The 1996 results
include an increase in new product development as the Company has
released 32 new products since 1995 and additional sales commissions
paid on the increased sales volume. The percentage decrease is
reflective of the Company's effort of increasing sales while maintaining
and controlling its costs.
Operating income for 1996 was $563,000 compared to an operating loss of
($375,000) in 1995. Other expense (net) was consistent as $160,000 was
incurred in 1996 compared to $156,000 in 1995. During 1995, the Company
realized a gain of $358,000 on the sale of excess warehouse space. Also
during 1995, the Company incurred a charge of $886,000 to settle a
warranty issue with a major customer. The Company has retained the
customer, which remains a significant contributor to operations. The
Company did not record an income tax expense in 1996 or 1995 due to the
Company's utilization of its net operating loss carryforward.
Net income for 1996 was $403,000 compared to a net loss of ($1,059,000)
in 1995. As stated, the Company adopted FAS 128 which establishes basic
and diluted earnings per share presentation. For 1996, basic and
diluted earnings per share were 10 cents per share, whereas 1995
reported basic and diluted loss per share of (26) cents.
Liquidity & Capital Resources
The Company's financial condition and liquidity are strong. The
Company's 1997 current ratio remains strong at 3.52 compared to 4.30 in
1996. Accounts receivable increased to $5,232,000 in 1997 compared to
$3,896,000 in 1996. Days outstanding were 52 days in 1997 compared to
44 in 1996; both which are far below the industry average of 75 days.
Inventory has increased to $9,257,000 in 1997 compared to $7,344,000 in
1996. The increase can be attributed to higher finished goods inventory
as the Company began shipments of its new WG2 product and higher raw
materials as the Company made a special accommodation for a large
customer. Inventory turns were 3.93 in 1997 compared to 4.28 in 1996;
both exceed the industry average of 3.40. Capital expenditures were
$296,000 in 1997 consistent with $296,000 in 1996.
Accounts payable has increased to $3,453,000 in 1997 compared to
$1,763,000 in 1996. This increase is attributed to funding higher
inventory at year-end. Long-term note payable increased to $1,800,000
in 1997 compared to $1,300,000 in 1996. This increase in borrowing was
primarily for funding working capital and higher sales growth. During
1997, the Company extended its long-term borrowing agreement until the
year 2000. Debt to equity remains low as it was 15.8% at the end of
1997 compared to 12.9% at year-end 1996. Shareholders' equity increased
to $11,385,000 in 1997 from $10,095,000 in 1996, and the book value
improved to $2.70 per share in 1997 compared to $2.48 per share in 1996.
Overall, the Company believes that its future financial requirements can
be met with funds generated from operating activities and from its
credit facility.
Inflation
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
Management believes that the effect of the year 2000 will not have a
significant impact on future operations and is in the process of testing
and correcting its systems as well as contacting key suppliers and
customers as to the impact it may have on their operations.
Balance Sheets
ASSETS
December 31,
1997 1996
Current Assets:
Cash & cash equivalents $ 149,787 $ 57,481
Accounts receivable, net of allowances
of $264,300 in 1997, & $106,933 in 1996 5,231,835 3,895,805
Note receivable (Note 2) 374,507 ---
Inventory (Note 3) 9,256,552 7,343,843
Prepaid expenses & other current assets 237,455 449,595
Total current assets $15,250,136 $11,746,724
Property, Plant & Equipment (at cost):
Land 206,144 206,144
Land improvements 71,243 71,243
Buildings & improvements 3,521,753 3,458,860
Machinery & equipment 6,049,931 5,925,802
Total property, plant & equipment 9,849,071 9,662,049
Less accumulated depreciation (7,578,823) (7,284,170)
Property, plant & equipment, net $ 2,270,248 $ 2,377,879
Total assets $17,520,384 $14,124,603
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
1997 1996
Current Liabilities:
Accounts payable $ 3,453,251 $ 1,762,736
Income taxes payable 10,000 ---
Accrued expenses (Note 8) 872,211 967,281
Total current liabilities $ 4,335,462 $ 2,730,017
Long-Term Liabilities:
Note payable (note 9) 1,800,000 1,300,000
Total Liabilities $ 6,135,462 $ 4,030,017
Shareholders' Equity:
Common shares, $1 par value; 25,000,000
shares authorized; 4,215,083 shares issued
& outstanding at December 31, 1997
4,068,426 shares issued & outstanding at
December 31, 1996 4,215,083 4,068,426
Capital in excess of par value 1,424,496 1,158,308
Retained earnings 5,933,193 5,157,953
Unearned compensation (187,850) (290,101)
Total shareholders' equity $11,384,922 $10,094,586
Total liabilities & shareholders'
equity $17,520,384 $14,124,603
See accompanying notes to financial statements
Statements of Operations
Year Ended December 31,
1997 1996 1995
Net sales $42,988,526 $36,667,774 $28,300,514
Cost & expenses:
Cost of sales 36,187,438 30,946,600 24,410,896
Engineering, selling &
administrative 5,677,183 5,157,948 4,264,893
Other expense (net) (Note 7) 338,665 160,124 155,806
Gain on sale of fixed assets --- --- (357,774)
Special charge (Note 10) --- --- 886,000
Earnings (loss) before
income taxes 785,240 403,102 (1,059,307)
Income tax 10,000 --- ---
Net earnings (loss) $ 775,240 $ 403,102 $(1,059,307)
Basic net earnings (loss)
per share $0.19 $0.10 $(0.26)
Diluted net earnings (loss)
per share $0.18 $0.10 $(0.26)
Basic average common shares
outstanding 4,128,524 4,061,860 4,015,717
Diluted average common shares
outstanding 4,316,368 4,153,762 4,015,717
Statements of Shareholders' Equity
Capital in Total
Common excess of Retained Unearned shareholders'
shares par value earnings compensation equity
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 & retired (21,270) (105,807) --- --- (127,077)
Amortization of unearned
compensation --- --- --- 93,500 93,500
December 31, 1995 $ 4,052,676 $ 1,096,892 $ 4,754,851 $ (271,000) $ 9,633,419
Net earnings --- --- 403,102 --- 403,102
Issuance of stock awards 12,000 54,854 --- (57,304) 9,550
Stock options exercised 3,750 6,562 --- --- 10,312
Amortization of unearned
compensation --- --- --- 38,203 38,203
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
See accompanying notes to financial statements
Statements of Cash Flows
Year Ended December 31,
1997 1996 1995
Cash flows from operating activities:
Net earnings (loss) $ 775,240 $ 403,102 $ (1,059,307)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Depreciation 403,989 463,859 489,432
Net gain on the sale of fixed assets --- --- (357,774)
Amortization of unearned compensation 217,301 38,203 93,500
Changes in current assets & liabilities:
Income tax receivable --- 62,182 266,245
Accounts receivable (1,336,030) (355,459) 2,564,977
Note receivable (374,508) --- ---
Inventory (1,912,709) 1,586,096 (3,098,442)
Prepaid expenses & other current assets 212,141 (74,748) 85,322
Accounts payable 1,690,515 (1,314,041) 1,154,153
Income taxes payable 10,000 --- ---
Accrued expenses (95,071) 232,847 (765,309)
Net cash provided by (used in) operating
activities $ (409,132) $ 1,042,041 $ (627,203)
Cash provided by (used in) investing
activities:
Additions to property, plant & equipment, net (296,357) (296,052) (346,467)
Proceeds from the disposition of fixed assets --- --- 600,637
Net cash provided by (used in) investing
activities $ (296,357) $ (296,052) $ 254,170
Cash provided by (used in) financing
activities:
Borrowings (repayments) from note payable 500,000 (1,825,000) 1,200,000
Proceeds from stock options exercised 297,795 19,862 359,364
Stock repurchased & retired --- --- (127,077)
Net cash provided by (used in) financing
activities $797,795 $(1,805,138) $ 1,432,287
Net increase (decrease) in cash & cash
equivalents 92,306 (1,059,149) 1,059,254
Cash & cash equivalents at beginning of year 57,481 1,116,630 57,376
Cash & cash equivalents at end of year $ 149,787 $ 57,481 $ 1,116,630
Supplemental cash flows disclosure:
Income taxes paid --- --- ---
Interest paid $ 222,375 $ 241,844 $ 164,566
See accompanying notes to financial statements
Notes to Financial Statements - December 31, 1997, 1996 & 1995
(1) 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 stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market.
Property, Plant & 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 are recorded at time of shipment.
Earnings Per Share
In December, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". The standard
establishes new methods for computing and presenting earnings per share
("EPS") and replaces the presentation of primary and fully-diluted EPS
with basic and diluted EPS. For presentation purposes, basic EPS is
based on the weighted average number of shares outstanding whereas
diluted EPS includes the dilutive effect of unexercised common stock
equivalents. Net loss per share is based on the weighted average number
of shares outstanding and does not include the effect of unexercised
stock options. All prior years reported within this report have been
restated to conform with this standard.
Financial Instruments
The fair value of the Company's financial instruments does not
materially vary from the carrying value of such instruments.
Reclassifications
Where appropriate, certain items relating to the prior years have been
reclassified to conform to the current year's presentation.
Research & Development
Research and development costs for the years ended December 31, 1997,
1996 and 1995 were approximately $1,786,000, $1,701,000, and 1,506,000,
respectively, which were 4.2%, 4.6% and 5.3% of annual sales,
respectively.
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.
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 that as of December 31, 1997, there has been
no impairment in the carrying values of long-lived assets.
(2) Nature of Business and Related Parties
Wells-Gardner Electronics Corporation is an ISO 9001 certified video
products corporation which designs, manufactures and assembles color
video monitors for the coin-operated video games, lottery and gaming
machines, leisure and fitness, service, automotive and display markets.
The Company's largest customer accounted for total revenues of 34%, 18%
and 15% in 1997, 1996 and 1995, respectively. Sales to customers
outside the United States were 21.8%, 24.4%, and 20.1% of total revenues
in 1997, 1996 and 1995, respectively.
Monitor and data display sales during the period 1997 to 1995 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, 1997, 1996 and 1995 were approximately $1,541,000,
$1,225,000 and $868,000, respectively. Commissions owed to James
Industries Inc. as of December 31, 1997, 1996 and 1995 were
approximately $246,000, $169,000 and $103,000 respectively. Total
commissions as a percentage of sales for the years ended December 31,
1997, 1996 and 1995 were 3.6%, 3.3% and 3.1%, respectively.
Sales to James Industries Inc. for the years ended December 31, 1997,
1996 and 1995 were approximately $406,000, $543,000 and $425,000,
respectively.
Outstanding accounts receivable due from James Industries Inc. at
December 31, 1997, 1996 and 1995 were approximately $100,000, $40,000
and $33,000, 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 should be 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. At December
31, 1997 the balance on the note was approximately $375,000.
(3) Inventory
Inventory consisted of the following components:
December 31,
1997 1996
Raw materials $ 6,253,877 $ 4,670,279
Work in progress $ 451,080 $ 597,574
Finished goods $ 2,551,595 $ 2,075,990
Total $ 9,256,552 $ 7,343,843
(4) Income Taxes
The effective income tax rates for 1997, 1996 and 1995 differed from the
expected Federal income tax rate (34%) for the following reasons:
1997 1996 1995
Computed expected tax (benefit) $ 281,000 $ 137,000 $ (360,000)
State income taxes (benefit)
net of Federal tax effect $ 40,000 $ 20,000 $ ( 52,000)
Other, net $ 12,000 $ 8,000 $ 6,000
Limitations on and utilization
of tax benefits $ (323,000) $ (165,000) $ 406,000
$ 10,000 --- ---
Deferred income taxes reflect the impact of temporary differences
between the 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, 1997 and 1996 consisted of:
1997 1996
Deferred tax assets:
Allowance for doubtful accounts $ 102,000 $ 41,000
Warranty reserve 44,000 37,000
Inventory reserve 110,000 169,000
Separation charge --- 39,000
Deferred compensation 55,000 ---
Contributions carryovers --- 14,000
Net operating loss carryforwards 940,000 1,293,000
Alternative minimum tax credit
carryforwards 60,000 50,000
General business credit carryforwards 129,000 129,000
Other 6,000 8,000
Total gross deferred tax assets $ 1,446,000 $ 1,780,000
Less valuation allowance (1,300,000) (1,623,000)
Net deferred tax assets $ 146,000 $ 157,000
Deferred tax liabilities:
Property, plant & equipment,
principally depreciation 146,000 157,000
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, 1997 was a decrease of $323,000 primarily due to the utilization of
net operating loss carryforwards. At December 31, 1997, the Company has
net operating loss carryforwards for Federal income tax purposes of
approximately $2,436,000 which are available to offset future Federal
taxable income, if any, through 2010. The Company also has alternative
minimum tax credit carryforwards of approximately $60,000 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 and a Nonemployee Director Stock Plan under
which directors may acquire up to 250,000 common shares. Options may be
granted thru December 31, 2004 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, 1997, 49
persons were eligible to participate in the plans and 43 persons held
outstanding options. Such options expire on dates ranging from April
24, 2000 to May 1, 2007.
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 available to common shareholders and net earnings
per common share would have been reduced to the pro forma amounts
indicated below:
1997 1996
Net earnings available to common shareholders
Basic and Diluted as reported $ 775,240 $ 403,102
Pro forma $ 732,494 $ 342,375
Net earnings per common and common
equivalent share
Basic as reported $ 0.19 $ 0.10
Diluted as reported $ 0.18 $ 0.10
Pro forma - Basic $ 0.18 $ 0.08
Pro forma - Diluted $ 0.17 $ 0.08
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 1997 and 1996, respectively:
expected volatility of 20 percent; risk free interest rates ranging from
5.4 percent to 7.8 percent; and expected lives of 5 years. Additional
information on shares subject to options is as follows:
1997 1996 1995
Weighted Weighted Weighted
Average Average Average
1997 Exercise 1996 Exercise 1995 Exercise
Options Price Options Price Options Price
Outstanding at 523,215 $ 3.35 277,411 $ 3.38 196,321 $ 4.13
beginning of year
Granted 285,789 $ 3.73 263,054 $ 3.30 221,300 $ 2.75
Forfeited (8,000) $ 3.50 (13,500) $ 3.13 (24,000) $ 5.10
Exercised (137,230) $ 3.02 (3,750) $ 2.75 (116,210) $ 3.09
Outstanding at 663,774 $ 3.56 523,215 $ 3.35 277,411 $ 3.38
end of year
Weighted average fair value
of options granted $ 1.22 $ 1.04 $ 1.88
Options exercisable
at year end 286,405 215,900 99,561
The following table summarizes information about stock options
outstanding at December 31, 1997:
Weighted Average Options
Range of Outstanding Remaining Weighted Average Exercisable
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97
$ 3.00 4,900 2 $ 3.00 4,900
$ 2.88 15,536 3 $ 2.88 15,536
$ 5.38 54,250 4 $ 5.38 54,250
$ 3.50 - $ 3.75 17,500 6 $ 3.64 17,500
$ 2.75 89,620 7 $ 2.75 41,870
$ 3.13 - $ 4.25 210,554 8 $ 3.34 91,527
$ 3.63 - $ 3.75 271,414 9 $ 3.73 60,822
663,774 8 $ 3.56 286,405
(6) Earnings Per Share
In accordance with Statement of Financial Accounting Standards No. 128
"Earnings Per Share", 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, 1997, 1996 and 1995:
December 31,
1997 1996 1995
Basic earnings per common share
Net income $ 775,240 $ 403,102 $(1,059,307)
Weighted average common shares
outstanding 4,128,524 4,061,860 4,015,717
Per share amount $0.19 $0.10 $(0.26)
Diluted earnings per common share
Net income $ 775,240 $ 403,102 $(1,059,307)
Weighted average common shares
outstanding 4,128,524 4,061,860 4,015,717
Add: Effect of dilutive stock options 187,844 91,902 ---
Adjusted weighted average common
shares outstanding 4,316,368 4,153,762 4,015,717
Per share amount $0.18 $0.10 $(0.26)
As of December 31, 1997, 1996 and 1995 respectively, 58,000, 99,554
and 0 options would have had an anti-dilutive effect on diluted earnings
per share and therefore, were not included in the above calculations.
(7) Other Expense (net)
Other expense (net) consisted of the following components:
December 31,
1997 1996 1995
Other expense, net $ 373,394 $ 286,443 $ 196,991
Other income, net $ (34,729) $ (126,319) $ (41,185)
Other expense (net) $ 338,665 $ 160,124 $ 155,806
(8) Accrued Expenses
Accrued expenses consisted of the following components:
December 31,
1997 1996
Payroll and additional salary $ 316,954 $ 254,619
Taxes other than on income $ 110,521 $ 125,989
Sales commissions $ 246,109 $ 168,726
Insurance $ 35,812 $ 172,350
Warranty $ 113,616 $ 97,101
Other accrued expenses $ 49,199 $ 148,496
Total $ 872,211 $ 967,281
(9) Note Payable
The note payable consisted of a revolving line of credit balance of
$1,800,000 and $1,300,000 at December 31, 1997 and 1996, respectively,
bearing interest at prime (8.50% at December 31, 1997 and 8.25% at
December 31, 1996). During 1997, the Company extended its long-term
banking agreement with Harris Trust and Savings Bank for its $7,000,000
revolving line of credit. This agreement runs through December 31, 1999.
At December 31, 1997 the Company had an unused balance of approximately
$4,253,300 on its line of credit. During 1997, the average rate for the
borrowings was 8.46%. The long-term note is uncollateralized with
certain covenant restrictions. The Company had an outstanding letter of
credit balance of approximately $947,000 and $50,400 at December 31,
1997 and 1996 respectively.
(10) 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.
(11) Lease Commitments
The Company leases certain data processing equipment under lease
agreements expiring through the year 2001. The following is a schedule
of future minimum lease payments required under operating leases as of
December 31, 1997:
Year
ending
December 31, Amount
1998 $ 27,962
1999 23,644
2000 20,100
2001 20,100
2002 0
Thereafter ---
$ 91,806
Rent expense related to operating leases were approximately $38,000,
$6,000 and $13,000 during the years ended December 31, 1997, 1996 and
1995, respectively.
(12) Unaudited Quarterly Financial Data
Selected quarterly data for 1997 and 1996 are as follows:
(In thousands except per-share data)
1997
First Second Third Fourth
Net sales $ 10,105 $ 12,016 $ 10,554 $ 10,314
Net earnings $ 109 $ 448 $ 188 $ 30
Basic net earnings per share $ 0.03 $ 0.11 $ 0.04 $ 0.01
Diluted net earnings per share $ 0.03 $ 0.10 $ 0.04 $ 0.01
1996
First Second Third Fourth
Net sales $ 10,429 $ 9,158 $ 7,950 $ 9,131
Net earnings (loss) $ 265 $ 151 $ 164 $ (177)
Basic net earnings (loss) per share $ 0.07 $ 0.03 $ 0.04 $ (0.04)
Diluted net earnings (loss) per share $ 0.07 $ 0.03 $ 0.04 $ (0.04)
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, 1997 and 1996 and the related
statements of operations, shareholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1997. 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, 1997 and 1996, and the
results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Chicago, Illinois
January 30, 1998
ALLAN GARDNER RETIRED FROM THE BOARD OF DIRECTORS IN 1997
Allan Gardner, 76, retired from Wells-Gardner's Board of Directors
during August of 1997. Allan first started with the Company 51 years
ago and before retiring from active employment in 1988, had served 25
years as the Vice President of sales.
His first position was in the stock room during 1947, and he moved into
television and high fidelity console sales in 1949. His career at
Wells-Gardner was indivisible from the sales effort. The year 1977 was
the low point of Wells-Gardner's corporate performance. Clearly the
offshore manufacturers were invading our country's consumer electronics
industries. Allan spearheaded a sales-purchase agreement, which is now
expired, with the General Corporation (later Fujitsu). The results led
the Company into the design, assembly, and sale of monitors, which
remain today our mainstream product.
Allan still views all employees at Wells-Gardner to be part of the
overall sales effort. In agreement with his founding father, George
Gardner, he always regarded the quality of Wells-Gardner personnel as
responsible for the success of the corporation.
We all wish Allan warmest regards and best wishes for the future.
DIRECTORS OFFICERS
Anthony Spier Anthony Spier
Chairman of the Board, President Chairman of the Board,
& Chief Executive Officer of President & Chief Executive
Wells-Gardner Electronics Officer
John R. Blouin Eugene C. Ahner
President of Director of Human Resources
James Industries, Inc.
Kathleen E. Hoppe
H. Wayne Harris Director of Management
President of Information Systems
Wayne Harris Company
Mark E. Komorowski
Ira J. Kaufman Vice President & General
Senior Managing Director of Manager of Business Services
Mesirow Financial, Inc.
Larry S. Mahl
Frank R. Martin Director of Materials
Senior Partner of
Righeimer, Martin & Cinquino, PC John S. Pircon
Vice President of
James J. Roberts, Jr. Marketing & Engineering
Chairman & Chief Executive Officer
of James Industries, Inc. Eric A. Slagh
Director of Quality
Randall S. Wells
Executive Vice President George B. Toma CPA, CMA
& General Manager of Vice President of Finance,
Wells-Gardner Electronics Chief Financial Officer
& Treasurer
Ernest R. Wish Randall S. Wells
Chairman of Executive Vice President
WRM, Inc. & General Manager
CORPORATE OFFICES TRANSFER AGENT
Wells-Gardner Electronics Corporation Harris Trust & Savings Bank
2701 North Kildare Avenue 311 West Monroe Street
Chicago, Illinois 60639 Chicago, Illinois 60690
Telephone: 773/252-8220 Telephone: 312/461-6848
ANNUAL MEETING INDEPENDENT AUDITORS
The annual meeting of shareholders KPMG Peat Marwick LLP
will take place on April 28, 1998 at Chicago, Illinois
2:00 p.m. at the above address.
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 without charge
upon written request to Mr. George
B. Toma at the above address.