EXHIBIT 13
Wells-Gardner Electronics Corporation
2001 Annual Report
SELECTED FINANCIAL DATA
(in $000's except for per share data)
Years Ended December 31,
2001 2000 1999 1998 1997
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Net sales $42,550 $46,464 $35,714 $40,604 $42,989
Moving related costs 1,334 --- --- --- ---
Operating earnings (loss) (2,372) 1,320 (612) 1,449 1,124
Gain on sale of fixed assets --- 329 --- --- ---
Earnings (loss) from continuing
operations (2,894) 1,092 (838) 1,075 775
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Loss on discontinued operations (2,813) (241) (352) (101) ---
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Net earnings (loss) ($5,707) $851 ($1,190) $974 $775
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Per share data:
Basic net earnings (loss) from
continuing operations ($0.57) $0.21 ($0.17) $0.22 $0.16
Diluted net earnings (loss)
from continuing operations ($0.57) $0.21 ($0.17) $0.21 $0.15
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Total assets $21,575 $26,076 $18,789 $19,671 $17,520
Long-term liabilities $8,925 $7,852 $3,576 $2,736 $1,800
Working capital $11,281 $15,377 $10,481 $10,199 $10,915
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COMMON SHARE MARKET PRICE
The Company's common shares are traded on the American Stock Exchange under
the symbol WGA. On December 31, 2001, there were approximately 664 holders
of record of the common shares. A five percent (5%) stock dividend was paid
in 2001 and 2000. High and low prices for the last two years were:
---------------------------------------------
2001 Prices 2000 Prices
High Low High Low
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Quarter ended:
March 31, 2.70 2.15 5.00 3.00
June 30, 3.95 2.50 4.00 2.75
September 30, 4.05 2.25 3.25 2.13
December 31, 2.95 2.05 2.69 1.50
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PRESIDENT'S REPORT 2001
TO OUR SHAREHOLDERS, CUSTOMERS, SUPPLIERS & EMPLOYEES:
This has been a year of enormous change for the Company, during which we
invested in our future and accomplished the following:
We consolidated our management control of American Gaming & Electronics
("AGE").
We developed a high quality Malaysian based management team to manage
our 50/50 manufacturing joint venture, Wells Eastern Asia Displays
("WEA") based in Kedah, Malaysia.
We moved our US plant and headquarters for the first time in 65 years
to a new, highly efficient facility in the Chicago area, which is half
the size of our original plant.
We implemented a new Oracle ERP system, which we needed to network our
4 US facilities and upgrade our IT capabilities.
We sold the Coin business that no longer fit the strategic direction of
the Company.
All of the above actions were a continuation of the implementation of the
strategic plan announced last year.
Strategic Plan for the 21st Century
We announced in July 2000 our new strategy for the 21st Century. Wells-
Gardner has now transitioned from a US based manufacturer primarily to the
low growth amusement market to a global manufacturing, service and parts
distribution Company to the fast growing gaming market. An integral aspect
of this strategy is to grow the more profitable parts and service business.
American Gaming & Electronics (AGE)
We acquired AGE in January 2000 and established it as a wholly owned
subsidiary. We have sales operations in Las Vegas, Reno, New Jersey,
California, Florida and Illinois. We are expanding into other gaming
jurisdictions in North and South America. We have major distribution
relationships with JCM, 3MTouch, Ithica, Starpoint, Money Controls, Coin
Mech and others. We signed contracts to install some manufacturers' new
gaming devices in New Jersey and Connecticut. We also purchase, refurbish
and market used gaming devices out of our New Jersey facility to both
national and international customers.
Wells Eastern Asia Displays (WEA)
In January 2000 we established WEA, our 50/50 joint venture in Malaysia with
Eastern Asia Technology Limited of Singapore, a public company traded on the
Singapore stock exchange. This production facility is essential to our
strategy of being a globally competitive manufacturer of video monitors. We
manufacture our long run monitors at WEA, many of which are for the gaming
market. We produced 29,600 monitors at WEA in 2001, which was more than
double the 2000 production of 13,200 monitors.
Gaming Strategy
Wells-Gardner is continuing its strategy of using its strengths in one
segment of the gaming market to leverage itself and increase its market
penetration in other segments of the gaming market. The Company is
participating in five segments of the gaming market:
Monitor manufacturing in Malaysia and the US for the gaming market.
Distributing Wells-Gardner's and other manufacturers' parts to
casinos throughout North America.
Servicing games and games parts for casinos throughout North
America.
Installing and servicing new gaming equipment into casinos in North
America.
Refurbishing and selling used gaming equipment to customers world-
wide.
The strategy is proving successful as gaming revenue accounted for
approximately 60 percent of the Company's total revenue in 2001, up from 52%
in 2000.
Parts and Service Strategy
A major and critical aspect of the 21st Century strategy is to grow the
more profitable parts and service business. This revenue accounted for
approximately 27 percent of the Company's 2001 total revenue, compared to
1.5 percent in 1994. This is an annual growth rate of 54 percent. In
addition, the average margin on this business is more than double the margin
of the rest of the business.
2001 Sales Declined Primarily Due to a Reduction in the Amusement Market
2001 sales were $42.6 million, down 8.4 percent or $3.9 million from $46.5
million in 2000. The decline was primarily caused by a reduction of $4.7
million in sales to our largest amusement customer of 2000, whom we
previously disclosed had exited our market during 2001. In addition, the
general state of the economy and the impact of the September 11 events
depressed sales in the gaming markets we serve, particularly in the last 4
months.
The International Sales Strategy Paid Dividends
The international sales strategy paid dividends in 2001 when the Company
received a 3-year exclusive manufacturing contract valued at approximately
$12 million per year to supply digital monitors to a major international
gaming manufacturer. This company will become our largest customer in 2002.
In addition the Company is supplying other international customers and is
expecting its international sales of monitors to grow at a considerably
faster rate than its US sales.
The Company Invested Heavily in 2001
The Company invested heavily in 2001 by implementing the actions described
above. A loss was recorded for 2001 of $5.7 million or $1.12 per share
compared to a profit $851,000 or $0.16 per share in 2000, which included a
non-recurring gain on the sale of assets of $329,000 or $0.07 per share.
Included in the 2001 results were two non-recurring charges associated with
our efforts to reposition the Company for the future. These included:
The cost of moving the Company's plant and headquarters of $1.3
million or $0.26 per share
The loss associated with the discontinuation of the Company's Coin
business of $2.8 million or $0.55 per share.
Digital Product Line
Wells-Gardner continued to market a full line of digital products for both
the gaming and amusement markets. We will be able to manufacture these
products in both Malaysia and the US. We have a competitive advantage over
most of our major competitors, and we believe that we could become a market
leader in video monitors to the gaming industry by the end of 2002. Already
we have obtained business from several new customers based entirely on a
combination of our digital capability and our Asian manufacturing cost
advantage.
Quality Continues To Be The Top Priority
Wells-Gardner remains committed to being the "best-in-class" quality
supplier in all our served markets. The Company became a "certified
supplier" to one of our major gaming customers, which is an important third
party endorsement of our quality approach.
2002 Outlook
Wells-Gardner made several major investments in 2001 and is poised to
maximize its opportunities in the growing gaming market, both through
monitor sales and sales of parts, service and used gaming devices sales
through AGE. The Company is also moving a substantial amount of production
to WEA in Malaysia, which is expected to improve profitability and
competitiveness. The major risk is the worldwide economy and uncertain
political climate.
We thank all of you for your continued support as we complete the
implementation of our strategic plan. We are confident that this will lead
to increased profitability and improved shareholder value.
Anthony Spier
Chairman of the Board, President
& Chief Executive Officer
March 8, 2002
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net sales from continuing operations decreased 8.4% to $42.6 million in 2001
compared to $46.5 million in 2000, as gross margin for 2001 decreased to
$7.4 million or 17.4% of sales compared to $9.5 million or 20.5% of sales in
2000. The decline was primarily caused by a reduction of $4.7 million of
sales to our largest amusement customer of 2000, who exited our market
during 2001. In addition the general state of the economy and the impact of
the September 11 events depressed sales particularly in the last 4 months in
the gaming markets we serve. Engineering, selling and administrative
expenses increased to $8.4 million in 2001 compared to $8.2 million in 2000.
The increase is attributed to the operating expenses incurred for American
Gaming and Electronics and the Company's initiative to invest in
international sales and new product development. Operating loss from
continuing operations for 2001 was $2.4 million compared to operating income
from continuing operations of $1.3 million in 2000. During the second
quarter of 2001, the Company moved its Chicago based operations to McCook,
Illinois which resulted in a charge to operations of $1.3 million.
Additionally, during the fourth quarter of 2001, the Company discontinued
its coin door business and recorded a loss on discontinued operations of
$2.8 million, which included a loss on disposal of assets of $2.4 million.
During the first quarter of 2000, the Company sold its headquarters and
recognized a gain on the sale of fixed assets of $329,000. Other expense,
net was $522,000 in 2001 compared to $549,000 in 2000 as the Company
incurred interest expense to fund the facility move and fund operations.
The Company did not record an income tax provision in 2001 compared to an
$8,000 income tax provision in 2000. The Company has available a net
operating loss carryforward of approximately $8.9 million at December 31,
2001. Net loss for 2001 was $5.7 million compared to a net profit of
$851,000 in 2000. For 2001, basic and diluted loss per share was $1.12,
compared to basic and diluted earnings per share of 16 cents for 2000.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net sales from continuing operations increased 30.1% to $46.5 million in
2000 compared to $35.7 million in 1999, as gross margin for 2000 increased
to $9.5 million or 20.5% of sales compared to $4.6 million or 13.0% of sales
in 1999. This increase is attributed to sales and margin recorded in
connection with the Company's January, 2000 acquisition of American Gaming
and Electronics. Engineering, selling and administrative expenses increased
to $8.2 million in 2000 compared to $5.3 million in 1999. The increase is
attributed to the operating expenses incurred for American Gaming and
Electronics. Operating income from continuing operations for 2000 was $1.3
million compared to an operating loss from continuing operations of
$612,000 in 1999. During the first quarter of 2000, the Company sold its
headquarters and recognized a gain on the sale of fixed assets of $329,000.
Other expense, net was $549,000 in 2000 compared to $226,000 in 1999 as the
Company incurred additional debt financing and interest expense to fund the
acquisition of American Gaming and Electronics. The Company recorded an
$8,000 and $0 income tax provision in 2000 and 1999, respectively, as the
Company has available a net operating loss carryforward of approximately
$3.1 million at December 31, 2000. Net earnings for 2000 were $851,000
compared to a net loss of $1.2 million in 1999. For 2000, basic and diluted
earnings per share was 16 cents, compared to basic and diluted loss per
share of 24 cents for 1999.
On January 4, 2000, the Company announced that it entered into a 50/50 joint
venture with Eastern Asia Technology Limited of Singapore to produce and
manufacture a full line of open frame video monitors in Malaysia. The joint
venture is accounted for under the equity method. On January 12, 2000, the
Company acquired certain assets of American Gaming and Electronics of Las
Vegas, New Jersey and Florida. American Gaming and Electronics is the
largest independent distributor of gaming parts and services in North
America and is operated as a wholly owned subsidiary.
Market and Credit Risks
The Company is subject to certain market risks, mainly interest rates.
During 2001, the Company entered into a two-year, $15.7 million, secured
credit facility with American National Bank. At December 31, 2001, the
Company had total outstanding bank debt of $10.1 million, which consisted of
$5.9 million on its revolving line of credit at an interest rate of 5.00%
and $4.2 million on its installment term note at an interest rate of 6.25%.
The Company believes that its exposure to interest rate fluctuations will be
limited due to the Company's practice of maintaining a minimal cash balance
in an effort to effectively use any excess cash flows to reduce outstanding
debt. All of the Company's debt is subject to variable interest rates. 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 without penalty. However, a 100
basis point increase in interest rates would result in an annual increase of
approximately $101,000 in interest expense recognized in the financial
statements.
The Company is exposed to credit risk on certain assets, primarily accounts
receivable. The Company provides credit to customers in the ordinary course
of business and performs ongoing credit evaluations. Concentrations of
credit risk with respect to trade receivables are somewhat limited due to
the large number of customers comprising the Company's customer base. The
Company currently believes its allowance for doubtful accounts is sufficient
to cover customer credit risks.
Liquidity & Capital Resources
Accounts receivable decreased to $5.9 million in 2001 compared to $7.7
million in 2000. This decrease is attributed to lower sales in the fourth
quarter of 2001. Inventory decreased to $10.0 million in 2001 compared to
$11.9 million in 2000. This decrease is attributed to the Company's ongoing
effort to minimize its on hand inventory at its domestic based locations,
which was partially offset as the Company held $1.6 million overseas to
support its international gaming customer. Overall domestic inventory
decreased $3.5 million from year-end 2000. Other current assets decreased
to $632,000 in 2001 from $1.2 million in 2000. Intangibles, net decreased
to $1.3 million in 2001 from $2.8 million in 2000, as the Company wrote off
$1.9 million of goodwill, which related to the discontinuance of the
Company's coin door division. Partially offsetting this decrease was
additional goodwill of $700,000 recorded in the first quarter 2001 for earn-
out payments made to the previous owners of American Gaming and Electronics.
Total liabilities increased to $14.4 million in 2001 compared to $13.4
million in 2000. This increase is attributed to increased borrowing on the
Company's line of credit. Shareholders' equity decreased to $7.2 million in
2001 from $12.7 million in 2000. Under its current credit facility, the
Company is required to maintain certain financial covenants. While the
Company currently expects to meet these financial covenants during 2002, its
liquidity could be adversely affected if it is unable to do so. Overall,
the Company believes that its future financial requirements can be met with
funds generated from operating activities and from its credit facility
during the foreseeable future.
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." SFS No. 141 requires the purchase method of accounting to be used
for all business combinations initiated after June 30, 2001. The Company
does not expect SFAS No. 141 to significantly impact its consolidated
financial statements. SFAS No. 142 changes the accounting of goodwill from
an amortization method to an impairment-only approach. Goodwill and other
intangible assets that have an indefinite life will not be amortized, but
rather will be tested for impairment annually or whenever an event occurs
indicating that the asset may be impaired. Management is currently
evaluating the impact that adoption of SFAS No. 142 will have on the
consolidated financial statements.
Inflation
During the past three years, management believes that inflation has not had
a material effect on the Company's results of operations.
CONSOLIDATED BALANCE SHEETS
Years ended December 31,
(in $000's except for share information)
-------------------
2001 2000
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ASSETS
Current Assets:
Cash & cash equivalents $159 $85
Accounts receivable, net of allowances
of $130 in 2001, & $70 in 2000 5,924 7,746
Inventory 10,011 11,875
Prepaid expenses & other assets 632 1,186
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Total current assets $16,726 $20,892
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Property, Plant & Equipment (at cost):
Leasehold improvements 267 12
Machinery, equipment & software 8,826 7,949
less: Accumulated depreciation & amortization (5,869) (5,677)
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Property, plant & equipment, net $3,224 $2,284
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Other Assets:
Investment in joint venture 296 142
Intangibles, net 1,329 2,758
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Total other assets $1,625 $2,900
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Total Assets $21,575 $26,076
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LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable 3,814 4,173
Accrued expenses 431 672
Installment term note payable 1,200 670
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Total current liabilities $5,445 $5,515
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Long-Term Liabilities:
Note payable 5,912 6,456
Installment term note payable 3,013 1,396
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Total long-term liabilities $8,925 $7,852
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Total Liabilities $14,370 $13,367
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Shareholders' Equity:
Common shares:
$1 par value; 25,000,000 shares authorized;
5,271,935 shares issued at December 31, 2001
4,897,869 shares issued at December 31, 2000 5,272 4,898
Capital in excess of par value 3,319 2,763
Retained earnings (deficit) (1,135) 5,213
Unearned compensation (251) (165)
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Total Shareholders' Equity $7,205 $12,709
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Total Liabilities & Shareholders' Equity $21,575 $26,076
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See accompanying notes to the consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
(in $000's except for share & per share data)
---------------------------
2001 2000 1999
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Net sales $42,550 $46,464 $35,714
Cost & expenses:
Cost of sales 35,136 36,924 31,073
Engineering, selling & administrative 8,352 8,155 5,253
Goodwill amortization 100 65 ---
Moving related costs 1,334 --- ---
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Operating earnings (loss) (2,372) 1,320 (612)
Gain on sale of fixed assets --- 329 ---
Other expense, net 522 549 226
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Earnings (loss) from continuing operations
before income tax (2,894) 1,100 (838)
Income tax --- 8 ---
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Earnings (loss) from continuing operations (2,894) 1,092 (838)
Loss on discontinued operations (including
loss on disposal of $2,394 in 2001) (2,813) (241) (352)
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Net earnings (loss) ($5,707) $851 ($1,190)
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Basic earnings (loss) per common share:
Continuing operations ($0.57) $0.21 ($0.17)
Discontinued operations $0.55 $0.05 $0.07
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Basic earnings (loss) per common share ($1.12) $0.16 ($0.24)
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Diluted earnings (loss) per common share:
Continuing operations ($0.57) $0.21 ($0.17)
Discontinued operations $0.55 $0.05 $0.07
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Diluted earnings (loss) per common share ($1.12) $0.16 ($0.24)
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Basic average common shares outstanding 5,119,405 5,164,339 4,980,535
Diluted average common shares outstanding 5,119,405 5,250,395 4,980,535
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in $000's)
---------------------------------------------------------
Capital In Retained Total
Common Excess Of Earnings Unearned Shareholders'
Shares Par Value (Deficit) Compensation Equity
--------------------------------------------------------------------------------------------------
December 31, 1998 $4,286 $1,527 $6,907 --- $12,720
Net loss --- --- (1,190) --- (1,190)
Stock dividend issued 215 254 (469) --- ---
Issuance of stock awards 30 63 --- --- 93
Shares issued from stock purchase plan 12 24 --- --- 36
Stock options exercised 1 1 --- --- 2
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December 31, 1999 $4,544 $1,869 $5,248 --- $11,661
--------------------------------------------------------------------------------------------------
Net earnings --- --- 851 --- 851
Stock dividend issued 229 657 (886) --- ---
Issuance of stock awards 86 173 --- (180) 79
Shares issued from stock purchase plan 12 24 --- --- 36
Stock options exercised 27 40 --- --- 67
Amortization of unearned compensation --- --- --- 15 15
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December 31, 2000 $4,898 $2,763 $5,213 ($165) $12,709
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Net loss --- --- (5,707) --- (5,707)
Stock dividend issued 242 399 (641) --- ---
Issuance of stock awards 76 103 --- (126) 53
Shares issued from stock purchase plan 12 22 --- --- 34
Stock options exercised 44 32 --- --- 76
Amortization of unearned compensation --- --- --- 40 40
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December 31, 2001 $5,272 $3,319 ($1,135) ($251) $7,205
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See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(in $000's)
---------------------------
2001 2000 1999
----------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) ($5,707) $851 ($1,190)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Loss on sale of discontinued operations 2,394 --- ---
Depreciation & amortization 764 586 647
Amortization of unearned compensation 40 15 ---
Gain on sale of fixed assets --- (329) ---
Share of (gain) / loss in joint venture (154) 64 ---
Changes in current assets & liabilities
(net of effects of acquisitions):
Accounts receivable 1,822 (2,196) 353
Note receivable --- --- 488
Inventory 1,435 (2,522) 69
Prepaid expenses & other 554 (571) (181)
Accounts payable (359) 1,703 (420)
Accrued expenses (241) (190) (298)
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Net cash provided by (used in) operating
activities $548 ($2,589) ($532)
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Cash used in investing activities:
Payments for acquisitions, net of cash
acquired (700) (1,975) ---
Proceeds from sale of fixed assets --- 1,499 ---
Net proceeds from sale of discontinued
operations 152 --- ---
Additions to property, plant & equipment (1,692) (1,427) (401)
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Net cash used in investing activities ($2,240) ($1,903) ($401)
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Cash provided by financing activities:
Net borrowings from note payable 1,603 4,276 896
Proceeds from options exercised &
purchase plan 163 182 130
----------------------------------------------------------------------------
Net cash provided by financing activities $1,766 $4,458 $1,026
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Net increase (decrease) in cash & cash
equivalents 74 (34) 93
Cash & cash equivalents at beginning of year 85 119 26
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Cash & cash equivalents at end of year $159 $85 $119
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Supplemental cash flows disclosure:
Income taxes paid --- $8 ---
Interest paid $739 $673 $408
Supplemental schedule of non-cash activities:
Investment in joint venture --- $200 ---
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. DESCRIPTION OF THE BUSINESS
Wells-Gardner Electronics is a sales, service, distribution and
manufacturing company that primarily services the gaming and amusement
markets, with facilities in the United States and a manufacturing joint
venture in Malaysia.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company at December 31, 2001
include the accounts of Wells-Gardner Electronics Corporation and its
wholly-owned subsidiary, American Gaming and Electronics. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
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.
Financial Instruments
The fair value of the Company's financial instruments does not materially
vary from the carrying value of such instruments.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market.
Property, Plant & Equipment
Property, plant and equipment are stated at cost and are depreciated and
amortized for financial reporting purposes over the estimated useful lives
on a straight-line basis as follows: machinery & equipment - five to fifteen
years & leasehold improvements - shorter of lease term or estimated useful
life.
Internal Use Software
The Company has adopted the provisions of Statement of Position 98-1,
"Accounting for the Costs of Software Developed or Obtained for Internal
Use." Accordingly, certain costs incurred in the planning and development
stage of internal use computer software projects are expensed, while costs
incurred during the application development stage are capitalized.
Capitalized software costs are amortized over the expected economic life of
the software. Total net capitalized costs as of December 31, 2001 and 2000
were $1.4 million and $1.2 million, respectively and are included in
property, plant & equipment on the face of the consolidated balance sheet.
During the years ended December 31, 2001 and 2000, amortization expense
related to the capitalized software was $200,000 and $0 respectively.
Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amounts should
be evaluated. Impairment is measured by comparing the carrying value to the
estimated undiscounted future cash flows expected to result from the use of
the assets and their eventual disposition. The Company has determined, on
the basis that there are no indicators, that as of December 31, 2001 there
has been no impairment in the carrying values of long-lived assets.
Investments
The Company's joint venture is accounted for under the equity method of
accounting in accordance with Accounting Principles Board (APB) No. 18, "The
Equity Method of Accounting for Investments in Common Stock." Under this
method, the investment is adjusted to recognize the Company's share of the
income or losses in the joint venture. Write downs are recognized when the
Company believes that a permanent impairment in value has occurred.
Intangibles
Intangible assets consist primarily of the cost of purchased businesses in
excess of the fair value of net assets acquired and are amortized on a
straight-line basis over periods of five and twenty years. The Company
regularly reviews the performance of the acquired business to evaluate the
realizability of the underlying goodwill. Amortization expense relating to
continuing operations in 2001, 2000 and 1999 was approximately $100,000,
$65,000 and $0 respectively. In 2001, the Company wrote off $1.9 million of
net intangible assets related to its discontinuance of the coin door
division.
Revenue Recognition
Revenue from sales of products is recorded at time of shipment.
Significant Customers
Approximately 10%, 21% and 32% of net sales in 2001, 2000 and 1999,
respectively, were to the Company's largest customer.
Earnings (Loss) Per Share
Basic earnings (loss) per share is based on the weighted average number of
shares outstanding whereas diluted earnings per share includes the dilutive
effect of unexercised common stock options. For all periods reported,
earnings per share have been retroactively restated to reflect the stock
dividends issued in 2001, 2000 and 1999.
Research & Development
Research and development costs for the years ended December 31, 2001, 2000
and 1999 were approximately $1,260,000, $1,344,000 and $1,261,000,
respectively, which were 2.9%, 2.9% and 3.5% of annual sales from continuing
operations, respectively.
Reclassifications
Certain amounts in previously issued financial statements have been
reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Note 3. RELATED-PARTY TRANSACTIONS
During the period 1999 to 2001, a portion of the Company's sales were made
through a sales representative firm, James Industries Inc., whose Chairman
and principal shareholder is a substantial beneficial shareholder of the
Company. Commissions earned by James Industries Inc. for the years ended
December 31, 2001, 2000 and 1999 were approximately $587,000, $965,000 and
$1,076,000, respectively. Commissions owed to James Industries Inc. as of
December 31, 2001, 2000 and 1999 were approximately $61,000, $55,000 and
$72,000 respectively. Total commissions as a percentage of sales from
continuing operations for the years ended December 31, 2001, 2000 and 1999
were 1.4%, 2.1% and 3.0%, respectively. Sales to James Industries Inc. for
the years ended December 31, 2001, 2000 and 1999 were approximately $16,000,
$108,000 and $261,000, respectively. Outstanding accounts receivable due
from James Industries Inc. at December 31, 2001, 2000 and 1999 were
approximately $2,000, $2,000 and $99,000, respectively.
Note 4. INVENTORY
Inventory consisted of the following components:
-------------------------------------------------
December 31,
--------------------
(in $000's) 2001 2000
-------------------------------------------------
Raw materials $5,405 $5,616
Work in progress 994 1,059
Finished goods 3,612 5,200
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Total $10,011 $11,875
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Note 5. DEBT
During 2001, the Company entered into a two-year, $15.7 million, secured
credit facility with American National Bank. Substantially all assets of
the Company are used as collateral for this credit facility. At December 31,
2001, the Company had total outstanding bank debt of $10.1 million which
consisted of $5.9 million on a revolving line of credit at an interest rate
of 5.00% and $4.2 million on a installment term note at an interest rate of
6.25%. The installment term note is being repaid with monthly principal
payments of $100,000. All remaining bank debt is due and payable on August
31, 2003.
Note 6. 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 1,620,675
common shares and a Nonemployee Director Stock Plan under which directors
may acquire up to 289,406 common shares. Options may be granted thru
December 31, 2008 at an option price not less than fair market value on the
date of grant and are exercisable not earlier than six months nor later than
ten years from the date of grant. Options vest over two and three year
periods. As of December 31, 2001, 46 persons held outstanding options and
were eligible to participate in the plans. Such options expire on various
dates through May 1, 2011.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. Had compensation cost for the
Company's stock option plans been determined consistent with FASB Statement
of Financial Accounting Standards No. 123 ("FAS 123"), the Company's net
earnings (loss) available to common shareholders and net earnings (loss) per
common share would have been as follows for the years ended December 31:
----------------------------------------------------------------------------
(in $000's except per share data) 2001 2000 1999
----------------------------------------------------------------------------
Net earnings (loss) available to
common shareholders:
As reported ($5,707) $851 ($1,190)
Pro forma (5,890) 719 (1,301)
Net earnings (loss) per common and
common equivalent share:
Basic as reported ($1.12) $0.16 ($0.24)
Diluted as reported (1.12) 0.16 (0.24)
Pro forma - Basic (1.12) 0.16 (0.24)
Pro forma - Diluted (1.12) 0.16 (0.24)
----------------------------------------------------------------------------
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 2001, 2000 and 1999, respectively: expected volatility of
33 percent; risk free interest rates ranging from 6.7 percent to 4.8
percent; and expected lives of 5 years. Additional information on shares
subject to options is as follows:
-----------------------------------------------------------------------------
2001 2000 1999
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price Options price Options price
-----------------------------------------------------------------------------
Outstanding at
beginning of year 1,337,470 $3.32 1,162,778 $3.48 867,864 $3.98
Granted 230,379 2.69 298,712 3.39 334,492 2.51
Forfeited (196,130) 3.17 (97,202) 3.67 (38,327) 3.69
Exercised (71,053) 2.77 (26,818) 2.65 (1,251) 2.50
-----------------------------------------------------------------------------
Outstanding at end
of year 1,300,666 $3.11 1,337,470 $3.32 1,162,778 $3.48
-----------------------------------------------------------------------------
Weighted average
fair value of
options granted $0.66 $0.86 $1.54
-----------------------------------------------------------------------------
Options exercisable
at year end 995,935 928,738 726,812
-----------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at December 31, 2001:
Weighted average
Range of Options remaining Weighted average Options
exercise prices outstanding contractual life exercise price exercisable
----------------------------------------------------------------------------
$2.22 - $2.69 516,573 7.4 $2.41 355,266
$2.70 - $3.23 380,547 7.5 3.16 296,108
$3.24 - $3.99 349,054 7.6 3.84 292,826
$4.00 - $4.64 54,492 2.7 4.62 51,735
----------------------------------------------------------------------------
1,300,666 7.3 $3.11 995,935
----------------------------------------------------------------------------
In November 2001, the Company granted 60,000 restricted shares of common
stock to seven employees of the Company. The employees will earn the
restricted shares in exchange for future services to be provided to the
Company over a five year period. The Company recorded deferred compensation
in the amount of $135,000, equal to the market value of the restricted
shares at the date of grant. In July 2000, the Company granted 60,000
restricted shares of common stock to seven employees and recorded $180,000
of deferred compensation equal to the market value of the restricted shares
at the date of grant. During 2001, 4,000 shares of restricted stock granted
in 2000 were cancelled. The Company recorded $40,000 and $15,000 in related
compensation expense for the years ended December 31, 2001 and 2000,
respectively.
Note 7. ACCRUED EXPENSES
Accrued expenses consisted of the following components:
---------------------------------------------------
December 31,
------------------
(in $000's) 2001 2000
---------------------------------------------------
Payroll & related costs $162 $432
Sales commissions 61 55
Warranty 60 90
Other accrued expenses 148 95
---------------------------------------------------
Total $431 $672
---------------------------------------------------
Note 8. OTHER EXPENSE, NET
Other expense, net consisted of the following components:
---------------------------------------------------
(in $000's) 2001 2000 1999
---------------------------------------------------
Interest expense $625 $464 $167
Other expense, net 55 123 111
Other income, net (158) (38) (52)
---------------------------------------------------
Other expense, net $522 $549 $226
---------------------------------------------------
Note 9. INCOME TAXES
The effective income tax rates differed from the expected Federal
income tax rate (34%) for the following reasons:
----------------------------------------------------------------------------
(in $000's) 2001 2000 1999
----------------------------------------------------------------------------
Computed expected tax expense (benefit) ($1,937) $292 ($405)
State income tax expense (benefit) net of
Federal tax effect (205) 49 (51)
Other, net (19) 1 40
Change in valuation allowance 2,161 (334) 416
----------------------------------------------------------------------------
--- $8 ---
----------------------------------------------------------------------------
Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities for financial reporting purposes and
as measured by income tax regulations. Temporary differences which gave
rise to deferred tax assets and deferred tax liabilities consisted of:
-------------------------------------------------------------------
December 31,
--------------
(in $000's) 2001 2000
-------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts $50 $35
Warranty reserve 23 35
Inventory reserve 153 142
Net operating loss carryforwards 3,379 1,190
Alternative minimum tax credit 73 73
carryforwards
General business credit carryforwards 129 129
Other 43 15
-------------------------------------------------------------------
Total gross deferred tax assets 3,850 1,619
Less valuation allowance (3,251) (1,090)
-------------------------------------------------------------------
Total deferred tax assets $599 $529
Deferred tax liabilities:
Software implementation 448 314
Deferred compensation 21 36
Property, plant & equipment, principally 130 179
depreciation
-------------------------------------------------------------------
Total deferred tax liabilities $599 $529
-------------------------------------------------------------------
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, 2001 was
an increase of $2,161,000. At December 31, 2001, the Company has net
operating loss carryforwards for Federal income tax purposes of
approximately $8,912,000 which are available to offset future Federal
taxable income, if any, through 2021. The Company also has alternative
minimum tax credit carryforwards of approximately $73,000 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 in 2007.
Note 10. EARNINGS PER SHARE
During 2001, 2000 and 1999, the Company issued a five percent (5%) stock
dividend payable to all common stock shareholders. The stock dividend
resulted in the issuance of 242,151, 228,582 and 214,627 additional common
shares in 2001, 2000 and 1999 respectively. All reported earnings per share
disclosures have been retroactively restated to reflect this dividend. 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:
----------------------------------------------------------------------------
(in $000's except for share data) 2001 2000 1999
----------------------------------------------------------------------------
Basic earnings (loss) per common share:
Earnings (loss) from continuing operations ($2,894) $1,092 ($838)
Loss on discontinued operations (2,813) (241) (352)
----------------------------------------------------------------------------
Net earnings (loss) ($5,707) $851 ($1,190)
Weighted average common shares outstanding 5,119 5,164 4,981
Continuing operations ($0.57) $0.21 ($0.17)
Discontinued operations ($0.55) ($0.05) ($0.07)
----------------------------------------------------------------------------
Basic earnings (loss) per common share ($1.12) $0.16 ($0.24)
----------------------------------------------------------------------------
Diluted earnings (loss) per common share:
Earnings (loss) from continuing operations ($2,894) $1,092 ($838)
Loss on discontinued operations (2,813) (241) (352)
----------------------------------------------------------------------------
Net earnings (loss) ($5,707) $851 ($1,190)
Weighted average common shares outstanding 5,119 5,164 4,981
Add: Effect of dilutive stock options --- 86 ---
----------------------------------------------------------------------------
Adjusted weighted average common shares 5,119 5,250 4,981
outstanding
Continuing operations ($0.57) $0.21 ($0.17)
Discontinued operations ($0.55) ($0.05) ($0.07)
----------------------------------------------------------------------------
Diluted earnings (loss) per common share ($1.12) $0.16 ($0.24)
----------------------------------------------------------------------------
Options which had an anti-dilutive effect at December 31, 2001, 2000 and
1999 were 767,148, 991,786 and 679,205, respectively and were excluded from
the diluted earnings per share calculation.
Note 11. JOINT VENTURE & ACQUISITION
On January 4, 2000, the Company entered into a 50/50 joint venture with
Eastern Asia Technology Limited of Singapore to produce and manufacture
video monitors in Malaysia. The joint venture is accounted for under the
equity method of accounting.
On January 12, 2000, the Company acquired certain assets of American Gaming
and Electronics of Las Vegas, New Jersey and Florida. This acquisition was
accounted for under the purchase method of accounting and is operated as a
wholly owned subsidiary. The proforma effects on the results of operations
had the acquisition occurred at the beginning of the year was immaterial.
Note 12. DISCONTINUED OPERATIONS
On December 3, 2001, the Company announced the sale of assets as of November
30, 2001 of its coin door division for a purchase price of $315,000. In
accordance with Statement of Financial Accounting Standards No. 144, the
Company recorded a loss on discontinued operations of $2,813,000 in 2001,
which is comprised of a loss from operations of $419,000 and a loss on
disposal of $2,394,000. Net sales of the discontinued operations were
$2,006,000 in 2001, $4,130,000 in 2000 and $2,621,000 in 1999.
Note 13. LEASE COMMITMENTS
The Company leases certain buildings, data processing and other equipment
under operating lease agreements expiring through the year 2008. The future
minimum lease payments required under operating leases are as follows:
-------------------------
Years ending
(in $000's) December 31,
-------------------------
2002 $825
2003 707
2004 632
2005 556
Thereafter 1,246
-------------------------
$3,966
-------------------------
Rent expense related to operating leases was approximately $872,000,
$427,000 and $161,000 during the years ended December 31, 2001, 2000 and
1999, respectively.
Note 14. UNAUDITED QUARTERLY FINANCIAL DATA
Selected quarterly data for 2001 and 2000 are as follows:
----------------------------------------------------------------------------
2001
------------------------------------
(in $000's except per share data) First Second Third Fourth
----------------------------------------------------------------------------
Net sales $11,570 $10,579 $9,883 $10,518
Net earnings (loss) ($680) ($2,111) ($337) ($2,579)
Basic net earnings (loss) per share ($0.13) ($0.42) ($0.07) ($0.50)
Diluted net earnings (loss) per share ($0.13) ($0.42) ($0.07) ($0.50)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2000
------------------------------------
(in $000's except per share data) First Second Third Fourth
----------------------------------------------------------------------------
Net sales $11,867 $12,977 $9,763 $11,857
Net earnings (loss) $596 $133 $232 ($110)
Basic net earnings (loss) per share $0.11 $0.03 $0.04 ($0.02)
Diluted net earnings (loss) per share $0.11 $0.03 $0.04 ($0.02)
----------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Wells-Gardner Electronics
Corporation:
We have audited the accompanying consolidated balance sheets of Wells-
Gardner Electronics Corporation and subsidiary as of December 31, 2001 and
2000 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period
ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wells-
Gardner Electronics Corporation and subsidiary at December 31, 2001 and
2000, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of
America.
Chicago, Illinois
February 1, 2002
BOARD OF DIRECTORS EXECUTIVE OFFICERS
Anthony Spier Anthony Spier
Chairman, President Chairman, President
& Chief Executive Officer & Chief Executive Officer
Marshall L. Burman Mark E. Komorowski
Counsel to Wildman, President of American
Harrold, Allen & Dixon Gaming & Electronics
Jerry Kalov George B. Toma CPA, CMA
President of Kay Consulting Vice President of Finance,
Chief Financial Officer, Treasurer
Frank R. Martin & Corporate Secretary
Senior Partner of Righeimer,
Martin & Cinquino, P.C.
Dr. Mark L. Yoseloff
Chairman & Chief Executive
Officer of Shuffle Master, Inc.
OFFICES
CORPORATE WHOLLY OWNED SUBSIDIARIES
--------- -------------------------
Wells-Gardner Electronics Corporation American Gaming & Electronics, Inc.
9500 West 55th Street, Suite A 6255 McLeod Drive, Suite 22
McCook, Illinois 60525-3605 Las Vegas, Nevada 89120
800-336-6630 800-727-6807
708-290-2100 702-798-5752
708-290-2200 (fax) 702-798-5762 (fax)
JOINT VENTURE 202 West Parkway Drive
Wells Eastern Asia Displays Egg Harbor Township,
(M) SDN BHD New Jersey 08234
Lot 316 & 317, Jalan PKNK 3/2 800-890-9298
Kawasan Peridustrian Sungai Petani 609-383-9970
08000 Sungai Petani, Kedah, Malaysia 609-383-9971 (fax)
60-4-441-1336
60-4-442-7028 (fax) 2046 McKinley Street
Hollywood, Florida 33020
954-922-9952
954-922-1855 (fax)
CORPORATE INFORMATION
ANNUAL MEETING BANKERS
--------------- --------
The annual meeting of shareholders American National Bank & Trust
will take place at 2:00 p.m. on Chicago, Illinois
Thursday, April 25, 2002 at the
corporate offices of the Company.
FORM 10-K AUDITORS
--------- --------
A copy of the Company's annual KPMG LLP
report on Form 10-K, without Chicago, Illinois
exhibits, as filed with the
Securities and Exchange Commission COUNSEL
is available without charge upon -------
written request to George B. Toma at Katten Muchin & Zavis
the corporate offices of the Company. Chicago, Illinois
TRANSFER AGENT
--------------
LaSalle National Bank
135 South LaSalle Street
Chicago, Illinois 60603
800-246-5761