Item 1. BUSINESS
(a) General Development of Business
Wells-Gardner Electronics Corporation (the "Company") is an ISO 9001 certified video products company which designs, manufactures, assembles and markets color video monitors, video liquid crystal and plasma displays, coin doors and coin mechanisms for a wide variety of markets including, but not limited to, coin-operated video games, lottery and gaming machines, leisure and fitness, automotive, display, intranet, service and video walls. The Company continues to focus on improving the quality of its products to achieve its goal of being the "best-in-class" quality supplier in all its served markets. During 1998, the Company passed its annual quality audit conducted by the ISO 9001 accreditation agency giving the Company certification through January 12, 2001. The Company was incorporated in Illinois in 1925.
(b) Narrative Description of Business
(c) (i), (ii) and (iii)
PRODUCTS
The Company's primary business is the design, manufacture, assembly and marketing of electronic components which consist of video color monitors and displays, coin doors and mechanisms and the bonding of touch sensors to video 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 it 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 1998, 1997 and 1996.
The Company offers a full line of video monitors, with CRT sizes ranging from 13" to 39" 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 1998, the Company released 10 new voltage free products which allow the products to be plugged in anywhere in the world. As a compliment to its core product line, the Company also offers a wide variety of mechanical coin doors and coin mechanisms. 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.
The Company's sales are comprised of five main applications:
1998 1997 1996 Amusement 38% 44% 49% Gaming 22% 20% 17% Service & Coin 20% 15% 11% Leisure / Fitness 9% 12% 13% Display / Other 11% 9% 10% Totals 100% 100% 100%
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 coin doors and mechanisms 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 custom designs 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 pressures.
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 firms. 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 0.2% of total 1998 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 33%, 34% and 18% in 1998, 1997 and 1996, respectively.
(c) (viii) The Company's 1998 year-end backlog was approximately 34,000 monitors representing approximately three 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 subcon- tracts 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 1998, the Company spent approximately $1,536,000 for product engineering, research and development costs, compared to $1,786,000 in 1997 and $1,701,000 in 1996.
(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, 1998, the Company employed approxi mately 199 persons. The Company believes its relationship with its employees is satisfactory.
(d) Export sales were 21 percent of s ales in 1998, 22 percent in 1997 and 24 percent in 1996.
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 1998, the plant operated at an average 59 percent capacity. The plant is not subject to any material encumbrance.
Item 3.
Item 3. LEGAL PROCEEDINGS
None
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the fourth quarter of 1998.
Unless otherwise indicated, each executive officer has served in various executive capacities with the Company for the past five years.
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.
Mark E. Komorowski joined the Company in 1990 and was elected as Vice President 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.
Eric Slagh joined the Company as Director of Quality in May, 1997. Prior to joining the Company, Mr. Slagh was Quality Assurance Manager at Danfoss Electronic Drives.
Jeff Sterling joined the Company as Vice President of Engineering in November, 1998. Prior to joining the Company, Mr. Sterling was Development Director of Commercial Products at Zenith Electronics.
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," which information is contained in the Company's Annual Report to Shareholders for the year ended December 31, 1998, 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 Data," which information is contained in the Company's Annual Report to Shareholders for the year ended December 31, 1998, 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 of Financial Condition and Results of Operations" which information is contained in the Company's Annual Report to Shareholders for the year ended December 31, 1998, 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, 1998 and which information hereby incorporated herein by reference.
Balance Sheets as of December 31, 1998 and 1997
Statements of Earnings for years ended December 31, 1998, 1997 and
Statements of Shareholders' Equity for years ended December 31, 1998, 1997 and 1996 Statements of Cash Flows for years ended December 31, 1998, 1997 and 1996
Notes to Financial Statements
Independent Auditors' Report
Quarterly financial data for the years ended December 31, 1998 and 1997 are set forth in Exhibit 13 in Note 13 of "Notes to Financial Statements" and are contained in the Company's Annual Report to Shareholders for the year ended December 31, 1998, 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 27, 1999, 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 27, 1999, under the captions "Summary Compensation Table," "Option Grants in 1998," "Aggregated Option Exercises in 1998 and Option Values at December 31, 1998," "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 27, 1999, 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 27, 1999, under the caption "Compensation Committee Interlocks and Insider Participation," which information is hereby incorporated 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 Auditors 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*. Amended Employment Agreement dated February 29, 1996, between the Company and Anthony Spier and incorporated herein by reference.
10.2. License Agreement dated January 1, 1995, between the Company and RCA Corporation and incorporated herein by reference.
10.3. Agreement dated July 1, 1997, between t he Company and Local 1031, I.B.E.W., AFL-CIO, and incorporated herein by reference.
10.4*. 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.
10.5*. 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.
10.6*. Wells-Gardner Electronics Corporation Amended and Restated Incentive Stock Plan, as amended and filed as Exhibit 4.1 of the Company's Form S-8, dated August 21, 1998.
10.7. Credit Agreements dated June 5, 1998, between American National Bank and Trust Company and the Company, filed as Exhibits 2.2, 2.3, 2.4 and 2.5 of the Company's Form 8K/A dated August 5, 1998 and incorporated herein by reference.
10.8. Amended and Restated Sales Representative Agreement dated December 9, 1998 and incorporated by reference in this Annual Report on Form 10-K.
10.9. Guaranty Agreement dated December 9, 1998, between James J. Roberts Jr., John R. Blouin and the Company and incorporated by reference in this Annual Report on Form 10-K.
10.10. Promissory Note dated December 9, 1998, between James Industries, James J. Roberts Jr., John R. Blouin and the Company and incorporated by reference in this Annual Report on Form 10-K.
10.11. Voting Rights Agreement dated December 9, 1998, among the Company, Anthony Spier, Randall S. Wells, John R. Blouin, James J. Roberts, Jr. and James Industries, Inc. and incorporated by reference in this Annual Report on Form 10-K.
13. Certain portions of the Company's Annual Report to Shareholders for the year ended December 31, 1998 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 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, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Secu- rities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WELLS-GARDNER ELECTRONICS CORPORATION
By: /S/ ANTHONY SPIER Anthony Spier Chairman of the Board, President and Chief Executive Officer February 10, 1999
/S/ GEORGE B. TOMA George B. Toma CPA, CMA Vice President of Finance, Chief Financial Officer and Treasurer February 10, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates indicated.
Signature Title Date
/S/ ANTHONY SPIER Anthony Spier Chairman of the Board, President and Chief Executive Officer February 10, 1999
/S/ JOHN R. BLOUIN John R. Blouin Director February 10, 1999
/S/ MARSHALL L. BURMAN Marshall L. Burman Director February 10, 1999
/S/ IRA J. KAUFMAN Ira J. Kaufman Director February 10, 1999
/S/ FRANK R. MARTIN Frank R. Martin Director February 10, 1999
/S/ JAMES J. ROBERTS, JR. James J. Roberts, Jr. Director February 10, 1999
/S/ RANDALL S. WELLS Randall S. Wells Director February 10, 1999
/S/ ERNEST R. WISH Ernest R. Wish Director February 10, 1999
FINANCIAL SCHEDULE
Schedules not included with this addi tional financial data have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereof.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at Beginning (1) (2) Balance at Year of Period Additions Deductions End of Period
1996 297,866 10,000 200,933 106,933
1997 106,933 175,000 17,633 264,300
1998 264,300 36,133 215,433 85,000
(1) Provision for bad debt. (2) Accounts receivable written off against the allowance.