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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
____________ to ____________
Commission File No. 1-8250
WELLS-GARDNER ELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
ILLINOIS 36-1944630
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2701 North Kildare Avenue, Chicago, Illinois 60639
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 773/252-8220
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1.00 par value American Stock Exchange
Title of each class Name of each exchange on
which registered
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
As of March 12, 1999, 4,293,547 shares of the Common Stock of the
registrant were outstanding.
While it is difficult to determine the number of shares of stock
owned by non affiliates, the registrant estimates that the aggregate
market value of the registrant's Common Stock held by non affiliates
on March 12, 1999 was approximately $8,949,000. This determination is
based upon an estimate that 72.5% of the shares are so owned by non
affiliates and upon the closing price for the Common Stock on the
American Stock Exchange on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Part
Portions of Annual Report to Shareholders for fiscal year
ended December 31, 1998: I & II
Portions of Proxy Statement for Annual Meeting of
Shareholders to be held on April 27, 1999: III
PART I
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. 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. LEGAL PROCEEDINGS
None
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
Year First
Elected As An
Name Office Age Executive Officer
Anthony Spier Chairman of the Board, President
and Chief Executive Officer 55 1994
Randall S. Wells Executive Vice President and
General Manager 47 1980
George B. Toma Vice President of Finance,
Chief Financial Officer and
Treasurer 31 1996
John S. Pircon Vice President of Marketing 40 1994
Mark E. Komorowski Vice President of Service and Coin 33 1994
Kathleen E. Hoppe Director of Information Technology 53 1994
Gene Ahner Director of Human Resources
and Corporate Secretary 62 1994
Larry Mahl Director of Materials 51 1989
Eric Slagh Director of Quality 33 1997
Jeff Sterling Vice President of Engineering 40 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. 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. 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. 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. 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
1996
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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
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. 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. 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. 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. 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.