Item 1. BUSINESS
(a) General Development of Business Wells-Gardner Electronics Corporation (the ``Company'') is an ISO 9001 certified video products corporation that designs, manufactures and assembles color cathode ray tube (``CRT'') video monitors. The Company sells video monitors to leading manufacturers of coin-operated video games, lottery terminals, video slot machines, video walls, leisure and fitness, INTRANET, media, automotive kiosks and other display applications.
In 1996, the Company reported its first annual profit since 1992. During 1996, the Company continued to aggressively invest in engineering research and development. This investment resulted in the introduction of 20 new products being released in the past two years which accounted for over 72% of 1996 revenues. As a result of the Company's continuously improving its quality, the Company passed its 1996 annual quality audit conducted by the ISO 9001 accreditation agency. The Company continues to focus on improving the quality of its products to achieve its goal of being the highest quality vendor in each of the markets it serves. The Company was incorporated in Illinois in 1925.
(b) Financial Information About Industry Segments The information required on industry segments for the three fiscal years ended December 31, 1996 is set forth in Exhibit 13 under the caption ``Selected Financial Results and Corporate Information'' and in Note 2 of ``Notes to Financial Statements,'' in the Company's Annual Report to Shareholders for the year ended December 31, 1996, and hereby incorporated herein by reference.
(c) Narrative Description of Business (c) (i), (ii) and (iii)
PRODUCTS The Company's primary business is the design, manufacture and assembly of electronic components which consist of video color monitors and the bonding of touch sensors to open frame monitors. The image on a CRT display is produced by magnetically guiding an interruptible stream of electrons against the back of a phosphorescent screen. This stream of electrons scans a series of horizontal lines from the top to the bottom of the screen. When the stream of electrons strikes the back of the screen a bright area is produced and when is interrupted, a dark area appears. In a medium-resolution unit, the stream of electrons scans the screen in a series of 525 horizontal lines 30 times per second, whereas the series of light and dark areas produced appears as a steady coherent image to the viewer. High-resolution displays scan a greater number of lines at a greater speed, thus producing a clearer image on the screen. CRT video products accounted for approximately 99 percent of revenues in 1996, 98 percent of revenues in 1995 and 96 percent of revenues in 1994.
The Company offers a full line of video monitors, with CRT sizes ranging from 3'' to 33'' with horizontal scan frequencies from 15kHz to 35kHz. In addition to providing standardized products, the Company also customizes electrical and mechanical applications to meet specific customer requirements. The Company's line of color display monitors have been redesigned over the past years for higher performance and lower per unit cost. In 1996, the Company released 12 new voltage free products which allow the products to be plugged in anywhere in the world.
The Company also optically bonds touch screen sensors to the face of the monitors to allow the user of a CRT video monitor to interact with a computer program by touching a video screen. Touch sensors are mainly used in the electronic video gaming, video slot machine, lottery terminal and kiosk applications.
The Company's sales are comprised of five main applications. Amusement sales accounted for 49 percent of total revenues in 1996, 46 percent in 1995 and 53 percent in 1994. Gaming sales accounted for 17 percent of sales in 1996, 24 percent in 1995 and 33 percent in 1994. Leisure and fitness sales accounted for 13 percent of sales in 1996, 14 percent in 1995 and 6 percent in 1994. Service sales accounted for 11 percent of sales in 1996, 8 percent in 1995 and 5 percent in 1994. Data and display sales accounted for 10 percent of sales in 1996, 8 percent in 1995 and 3 percent in 1994.
MANUFACTURING AND ASSEMBLY
The Company's production activities consist primarily of wiring printed circuit boards, assembling finished units (and to a limited extent subassemblies), aligning, testing and optically bonding touch sensors. The Company manufactures a limited range of electronic components and therefore relies on outside sources for the majority of the other required components. A limited number of sources are available for such electronic components and the other raw materials. Two sources supply the Company with almost all of the chassis subassemblies for its two-dimensional color game monitors. Chassis subassemblies are contracted off shore based on a design developed by the Company. As the Company believes is characteristic of other manufacturers in its industry, it has been confronted with long lead times and cost increases.
MARKETING AND SALES
The Company sells products throughout the world. The Company's products are sold primarily through James Industries, Inc., a sales representative organization. This representation is currently furnished under a Sales Representation Agreement (See Item 13. Certain Relationships and Related Transactions). James Industries, Inc. is headquartered in Inverness, Illinois and also utilizes the services of regional sub-representative f irms. The Company maintains its own internal sales staff primarily for sales of products not covered under the Sales Representation Agreement, repair and service of its products and to support its external sales representative organization.
(c) (iv) The Company is licensed on a non-exclusive basis under certain patents owned by RCA Corporation, covering the technical and electrical design of color display and video monitor chassis. Fees under these licenses are based on the number of units shipped and amounted to less than 0.3% of total 1996 revenue. Although certain of these licenses may expire in the future, it has been the practice of the Company to renew such licenses on substantially the same terms. However, failure of the Company to obtain renewal of any of these licenses could have a materially adverse effect on the Company's business, financial condition and results of operations.
(c) (v) The Company's business is generally not seasonal.
(c) (vi) The Company has no unique or unusual practices relating to working capital items.
(c) (vii) The Company's largest customer accounted for total revenues of 18%, 15% and 19% in 1996, 1995 and 1994, respectively.
(c) (viii) The Company's 1996 year-end backlog was approximately 32,000 monitors representing approximately 4 months sales. It is the Company's experience that well over 90 percent of backlog results in revenue recognition.
(c) (ix) No material portion of the Company's business is subject to re-negotiation of profits or termination of contracts or subcontracts at the election of the Government.
(c) (x) The Company encounters intense competition from many domestic and foreign manufacturers. Due to the nature of its business and the absence of reliable industry statistics, the Company cannot estimate its position in relation to its competitors. However, the Company recognizes that some competitors have greater financial and personnel resources, handle more extensive lines of products, operate larger facilities and price some products more competitively than the Company. Although the Company believes that the prices of its products are competitive, it endeavors to meet competition primarily through the quality of its product line, service and delivery reliability and new product innovations.
(c) (xi) During 1996, the Company spent approximately $1,701,000 for product engineering, research and development costs, compared to $1,506,000 in 1995 and $1,393,000 in 1994.
(c) (xii) Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has no material effect upon the capital expenditures, earnings and competitive position of the Company.
(c) (xiii) At December 31, 1996, the Company employed approximately 180 persons. The Company believes its relationship with its employees is satisfactory.
(d) Export sales were 13 percent of sales in 1996, 20 percent in 1995 and 20 percent in 1994.
Item 2.

Item 2. PROPERTIES
The Company's plant, which is owned by the Company, is located at 2701 North Kildare Avenue in Chicago, Illinois. It has approximately 207,000 square feet of floor space. Not less than 100,000 of the 207,000 square feet of the plant are at any time dedicated to production. Offices for engineering, sales and administration are also located at that facility. The plant is in good condition, is well maintained, and currently has excess production capacity. In 1996, the plant operated at an average 55% capacity. The plant is not subject to any material encumbrance. In 1995, the Company sold approximately 63,000 square feet of excess building capacity.
Item 3.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's share- holders during the fourth quarter of 1996.
Unless otherwise indicated, each executive officer has served in various executive capacities with the Company for the past five years.
Anthony Spier joined the Company in 1994 as Chairman of the Board, President and Chief Executive Officer. Mr. Spier has been a Director of the Company since April, 1990. Before joining the Company, Mr. Spier was President of Bruning Corporation, a manufacturer of drafting equipment and supplies from 1989 to 1994.
Randall S. Wells joined the Company in 1971 and was elected Executive Vice President and General Manager of the Company in April, 1987. Prior to this election, Mr. Wells held various manufacturing positions within the Company.
George B. Toma joined the Company in 1990 and was elected Vice President of Finance, Chief Financial Officer and Treasurer in February, 1997. Mr. Toma was previously elected Chief Financial Officer and Treasurer in April, 1996 and prior thereto held various accounting positions within the Company. Prior to joining the Company, Mr. Toma was an auditor with Laventhol & Horwath. Mr. Toma is a certified public accountant as well as a certified management accountant.
John S. Pircon joined the Company in 1987 and was elected Vice President of Marketing and Engineering in August, 1995. Mr. Pircon was previously elected Director of Engineering in April, 1994 and prior thereto held various other engineering, marketing and sales positions within the Company.
Mark E. Komorowski joined the Company in 1990 and was elected Vice President and General Manager of Business Services in April, 1996. Prior to this election, Mr. Komorowski held the position of Controller. Prior to joining the Company, Mr. Komorowski was an auditor with Laventhol & Horwath.
Kathleen E. Hoppe joined the Company in 1970 and was elected Director of Management Information Systems in August, 1994. Prior to this election, Ms. Hoppe held various information systems positions within the Company.
Larry Mahl joined the Company in 1981 and was elected Director of Materials in April, 1989. Prior to this election, Mr. Mahl held various other engineering positions within the Company.
Eugene C. Ahner joined the Company in 1992 and was elected Director of Human Resources in August, 1994. Prior to this election, Mr. Ahner held the position as Personnel Manager. Prior to joining the Company, Mr. Ahner was Director of Human Resources and Secretary of Pheoll Manufacturing Company from 1985 to 1992.
PART II
Item 5.

Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS MATTERS.
The information required by this Item is set forth in Exhibit 13 under the caption ``Common Share Market Price and Dividends'', which information is contained in the Company's Annual Report to Shareholders for the year ended December 31, 1996, and which information is hereby incorporated herein by reference.
Item 6.

Item 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in Exhibit 13 under the caption ``Selected Financial Results and Corporate Information'', which information is contained in the Company's Annual Report to Shareholders for the year ended December 31, 1996, and which information is hereby incorporated herein by reference.
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is set forth in Exhibit 13 under the caption ``Management's Discussion and Analysis'', which information is contained in the Company's Annual Report to Shareholders for the year ended December 31, 1996, and which information is hereby incorporated herein by reference.
Because the Company wants to provide shareholders and potential investors with more meaningful and useful information, this Report contains certain forward-looking statements (as such term is defined in the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended) that reflect the Company's current expectations regarding the future results of operations, performance and achievements of the Company. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company has tried, wherever possible, to identify these forward-looking statements by using words such as ``anticipate'', ``believe'', ``estimate'', ``expect'' and similar expressions. These statements reflect the Company's current beliefs and are based on information currently available to it. Accordingly, these statements are subject to certain risks, uncertainties and assumptions which could cause the Company's future results, performance or achievements to differ materially from those expressed in, or implied by, any of these statements. The Company undertakes no obligation to release publicly the results of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.
Item 8.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements together with the notes thereto are set forth in Exhibit 13, which information is contained in the Company's Annual Report to Shareholders for the year ended December 31, 1996 and which information hereby incorporated herein by reference.
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for years ended December 31, 1996, 1995 and
Statements of Shareholders' Equity for years ended December 31, 1996, 1995 and 1994
Statements of Cash Flows for years ended December 31, 1996, 1995 and
Notes to Financial Statements
Independent Auditors' Report
Quarterly financial data for the years ended December 31, 1996 and 1995 are set forth in Exhibit 13 in Note 11 of ``Notes to Financial Statements'' and are contained in the Company's Annual Report to Shareholders for the year ended December 31, 1996, and which information is hereby incorporated herein by reference.
Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
a. Directors
The information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 22, 1997, under the captions ``Election of Directors'' and ``Compliance with Section 16(a) of the Exchange Act'', which information is hereby incorporated herein by reference.
b. Executive Officers
Reference is made to ``Executive Officers of the Registrant '' in Part I hereof.
Item 11.

Item 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 22, 1997, under the captions ``Summary Compensation Table'', ``Option Grants in 1996'', "Aggregated Option Exercises in 1996 and Option Values at December 31, 1996'', ``Report of Board of Directors on Compensation'' and ``Compensation Committee Interlocks and Insider Participation'', which information is hereby incorporated herein by reference.
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 22, 1997, under the caption ``Securities Beneficially Owned by Principal Shareholders and Management'', which information is hereby incorporated herein by reference.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 22, 1997, under the caption ``Compensation Committee Interlocks and Insider Participation'', which information is hereby incorpo rated herein by reference.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. (1) Financial Statements The information required by this Item is set forth in Part II, Item 8 of this Report. The Independent Auditor's Report is set forth following the Financial Statement Schedule referred to under (2) below.
(2) Financial Statement Schedules The information required by this Item is set forth following the signature page of this Report.
(3) Exhibits
The following exhibits are filed herewith:
3.1. Articles of Incorporation of the Company, as amended, filed as Exhibit 3.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference.
3.2. By-Laws of the Company, as amended, filed as Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference.
*10.1. Wells-Gardner Electronics Corporation Amended and Restated Incentive Stock Plan, as amended, filed as Appendix A to the Company's Proxy Statement for Annual Meeting of Shareholders held on April 23, 1995, and incorporated herein by reference.
10.2. Sales Representative Agreement among the Company, James Industries, Inc. and James J. Roberts Jr. dated February 29, 1996, and incorporated herein by reference.
*10.3. Amended Employment Agreement dated February 29, 1996, between the Company, and Anthony Spier and incorporated herein by reference.
10.4. License Agreement dated January 1, 1995, between the Company and RCA Corporation, and incorporated herein by reference.
*10.5. Employment contract dated June 12, 1989, between the Company and Larry Mahl, filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference.
*10.6. Employment contract dated April 26, 1994, between the Company and Randall S. Wells, filed as Exhibit 10.2 of the Company's Form 10-Q dated June 30, 1994, and incorporated herein by reference.
10.7. Agreement dated July 1, 1995, between the Company and Local 1031, I.B.E.W., AFL-CIO, and incorporated herein by reference.
*10.9. Wells-Gardner Electronics Corporation Employee 401K Plan dated January 1, 1990 and Amendment 1 dated February 11, 1992, and Amendment 2 dated January 20, 1994, filed as Exhibit 10.10 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference.
10.11. Voting Rights Agreement dated February 29, 1996, among the Company, Albert S. Wells, Jr., Randall S. Wells, Anthony Spier, Allan Gardner, John R. Blouin, James Industries, Inc., and James J. Roberts, Jr., individually and as Trustee of James J. Roberts, Trust, UTA dated December 23, 1991, and incorporated herein by reference.
*10.12. Wells-Gardner Electronics Corporation 1996 Nonemployee Director Plan, filed as Annex A to the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 23, 1996, and incorporated herein by reference.
*10.13. Assignment of Rights and Royalty Agreement dated January 17, 1997, between the Company, Randall S. Wells and Mark Komorowski and incorporated herein by reference.
13. Certain portions of the Company's Annual Report to Shareholders for the year ended December 31, 1996 as specified in Part I and II hereof to be incorporated by reference in this Annual Report on Form 10-K.
23. Consent of KPMG Peat Marwick, LLP.
27. Financial Data Schedule
*Management contract or compensatory plan or arrangement.
b. Reports on Form 8-K No reports on Form 8-K were filed during the last quarter ended December 31, 1996.
FINANCIAL SCHEDULE
Schedules not included with this additional financial data have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereof.
EXHIBIT INDEX
3.1. Articles of Incorporation of the Company, as amended, filed as Exhibit 3.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference.
3.2. By-Laws of the Company, as amended, filed as Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference.
*10.1. Wells-Gardner Electronics Corporation Amended and Restated Incentive Stock Plan, as amended, filed as Appendix A to the Company's Proxy Statement for Annual Meeting of Shareholders held on April 23, 1995, and incorporated herein by reference.
10.2. Sales Representative Agreement among the Company, James Industries, Inc. and James J. Roberts Jr. dated February 29, 1996, and incorporated herein by reference.
*10.3. Amended Employment Agreement dated February 29, 1996, between the Company, and Anthony Spier, and incorporated herein by reference.
10.4. License Agreement dated January 1, 1995, between the Company and RCA Corporation, and incorporated herein by reference.
*10.5. Employment contract dated June 12, 1989, between the Company and Larry Mahl, filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference.
*10.6. Employment contract dated April 26, 1994, between the Company and Randall S. Wells, filed as Exhibit 10.2 of the Company's Form 10-Q dated June 30, 1994, and incorporated herein by reference.
10.7. Agreement dated July 1, 1995, between the Company and Local 1031, I.B.E.W., AFL-CIO, and incorporated herein by reference.
*10.9. Wells-Gardner Electronics Corporation Employee 401K Plan dated January 1, 1990, and Amendment 1 dated February 11, 1992, and Amendment 2 dated January 20, 1994, filed as Exhibit 10.10 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference.
10.11. Voting Rights Agreement dated February 29, 1996, among the Company, Albert S. Wells, Jr., Randall S. Wells, Anthony Spier, Allan Gardner, John R. Blouin, James Industries, Inc., and James J. Roberts, Jr., individually and as Trustee of James J. Roberts, Trust, UTA dated December 23, 1991, and incorporated herein by reference.
*10.12. Wells-Gardner Electronics Corporation 1996 Nonemployee Director Plan, filed as Annex A to the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 23, 1996, and incorporated herein by reference.
*10.13. Assignment of Rights and Royalty Agreement dated January 17, 1997, between the Company, Randall S. Wells and Mark Komorowski and incorporated herein by reference.
13. Certain portions of the Company's Annual Report to Shareholders for the year ended December 31, 1996, as specified in Part I and II hereof to be incorporated by reference in this Annual Report on Form 10-K.
23. Consent of KPMG Peat Marwick, LLP.
27. Financial Data Schedule
*Management contract or compensatory plan or arrangement.