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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2001
Commission File Number 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
incorporation or organization) Identification Number)
9500 West 55th Street, Suite A
McCook, Illinois 60525-3605
(Address of principal executive offices)
Registrant's telephone number, including area code: 708/290-2100
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 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). YES X NO
Indicate by check mark whether the registrant 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. [ ]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant (assuming for the purposes hereof, that
directors, executive officers and 10% or greater stockholders of the
registrant are affiliates of the registrant), based upon the closing sale
price of the registrant's Common Stock on March 1, 2002 was approximately
$12,188,000.
The number of shares of the registrant's Common Stock outstanding as of
March 1, 2002, were approximately 5,276,675.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 2001 are incorporated into Part II of this Report on Form
10-K and filed as Exhibit 13 hereto. Portions of the Registrant's
Definitive Proxy Statement relating to the Registrant's 2002 Annual Meeting
of Stockholders to be filed hereafter are incorporated into Part II of this
Report on Form 10-K.
As used in this Annual Report on Form 10-K, the terms "we," "us," "our"
and "the Company" mean Wells-Gardner Electronics Corporation, an Illinois
corporation, and its subsidiaries, unless the context indicates a difference
meaning, and the term "common stock" means our common stock, $1.00 par value
per share.
PART I
Item 1. BUSINESS
OVERVIEW
Founded in 1925, Wells-Gardner Electronics Corporation is a distributor and
manufacturer of color video monitors and other related distribution products
for a variety of markets including, but not limited to, gaming machine
manufacturers, casinos, coin-operated video game manufacturers and other
display integrators. During 2000, the Company formed a 50/50 joint venture
named Wells-Eastern Asia Displays ("WEA") to manufacture video monitors in
Malaysia. In addition, in January 2000, the Company acquired American Gaming
& Electronics, Inc. ("AGE"). AGE, a leading parts distributor to the gaming
markets, sells parts and services to over 500 casinos in North America with
offices in Las Vegas, Nevada; Egg Harbor Township, New Jersey; Hollywood,
Florida and McCook, Illinois. AGE also sells refurbished gaming machines on
a global basis as well as installs and services some brands of new gaming
machines into casinos in North America. In December 2001, the Company sold
the assets of its coin door division. Wells-Gardner is publicly traded on
the American Stock Exchange under the symbol WGA.
PRODUCTS
The Company's primary business is the distribution, design, manufacture,
assembly, service and marketing of electronic components which consist of
video color monitors and displays, gaming supplies and components and the
bonding of touch sensors to video monitors. Related video products and
accessories accounted for approximately 99 percent of revenue in 2001, 2000
and 1999.
The Company offers a full line of video monitors, with CRT sizes ranging
from 13" to 39" with horizontal scan frequencies from 15kHz to 70kHz. In
addition to providing standardized products, the Company also customizes
electrical and mechanical applications to meet specific customer require-
ments and 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 sells into the following markets:
Market 2001 2000 1999
--------------------------------------------
Gaming 60% 52% 37%
Amusement 34% 40% 52%
Other 6% 8% 11%
------------------------
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 in
both its Illinois plant and in WEA's plant in Malaysia. 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 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. A portion of the Company's
products are sold through James Industries, Inc. under a Sales
Representation Agreement (See Item 13. Certain Relationships and Related
Transactions). James Industries, Inc. is headquartered in Inverness,
Illinois and uses the services of regional sub-representative agents and
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.
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 1% of total 2001 reve-
nue. 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.
The Company's business is generally not seasonal.
The Company has no unique or unusual practices relating to working capital
items.
The Company's largest customer accounted for total revenues of 10%, 21% and
32% in 2001, 2000 and 1999, respectively.
The Company's 2001 year-end backlog was approximately $8.3 million,
representing approximately two months sales. It is the Company's experience
that well over 90 percent of backlog results in revenue recognition.
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.
During 2001, the Company spent approximately $1,260,000 for product
engineering, research and development costs, compared to $1,344,000 in 2000
and $1,261,000 in 1999.
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.
At December 31, 2001, the Company employed approximately 155 employees. The
Company believes its relationship with its employees is satisfactory.
Export sales were approximately five percent of sales in 2001 and three
percent of sales in 2000 and 1999.
RISK FACTORS RELATED TO OUR BUSINESS AND INDUSTRY
Our business may be harmed if we are unable to renew the licenses for the
intellectual property we use in the manufacture of our products.
A significant portion of our revenues are derived from the sale of products
we manufacture using licensed patents and/or technology. If we fail to
renew these licenses on favorable terms or at all, we could be forced to
stop manufacturing and distributing these products and our financial
condition could be adversely affected.
The loss of or interruption of supply from, our key suppliers could limit
our ability to manufacture our products.
We purchase certain materials and components for our products from various
suppliers, some of which are located outside of the U.S. Any loss of, or
interruption of supply from our key suppliers may require us to find new
suppliers. We could experience production or development delays while we
seek new suppliers and could have difficulty finding new suppliers, which
could substantially impair our operating results and business.
Our growth could be impaired if we are not able to continue to develop and
maintain the success of WEA.
WEA, the Malaysian joint venture we established in January 2000 with Eastern
Asia Technology Limited of Singapore, is an important part of our plan for
growth. We expect to produce a significant amount of our manufacturing
requirements at WEA's facility in Malaysia. Our growth will depend, in
large part, on the success of WEA. If we are unable to successfully execute
this strategy, we may not be able to grow as expected.
Intense competition in our industry could impair our ability to grow and
achieve profitability.
We may not be able to compete effectively with current or future
competitors. The market for our products and services is rapidly evolving
and intensely competitive. We expect this competition to further intensify
in the future. Some of our competitors are large companies with greater
financial, marketing and product development resources than ours. In
addition, new competitors may enter our key markets. This may place us at a
disadvantage in responding to our competitors' pricing strategies,
technological advances and other initiatives.
Our gaming business is heavily regulated and we depend on our ability to
obtain/ maintain regulatory approvals.
The manufacture and distribution of parts for gaming machines are subject to
extensive federal, state, local and foreign regulations and taxes, and the
governments of the various gaming jurisdictions amend these regulations from
time to time. Virtually all of these jurisdictions require licenses,
permits, documentation of qualification, including evidence of financial
stability, and other forms of approval for manufacturers and distributors of
gaming machines and for their officers, directors, major shareholders and
key personnel. The revocation or denial of a license in a particular
jurisdiction could adversely affect our ability to obtain or maintain
licenses in other jurisdictions.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Because we want to provide you with more meaningful and useful information,
this annual report includes forward-looking statements that reflect our
current expectations and projections about our future results, performance,
prospects and opportunities. You can find many of these statements by
looking for words such as "may," "will," "expect," "anticipate," "believe,"
"intend," "estimate" and similar expressions. These forward-looking
statements are based on information currently available to us and are
subject to a number of risks, uncertainties and other factors that could
cause our actual results, performance, prospects or opportunities in 2002
and beyond to differ materially from those expressed in, or implied by,
these forward-looking statements. These risks, uncertainties and other
factors include but are not limited to the factors described under the
heading "Risk Factors" above. We caution you not to place undue reliance on
any forward-looking statements. Except as otherwise required by federal
securities laws, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, changed circumstances or any other reason after the date of this
annual report.
Item 2. PROPERTIES
The Company's current manufacturing and corporate headquarters is located at
9500 West 55th Street, Suite A, McCook. The Company's current leased McCook
facility has approximately 104,000 square feet of floor space. Not less than
85,000 of the 104,000 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. The Company also
has other leased facilities to support the operations of AGE in Nevada, New
Jersey and Florida.
Item 3. LEGAL PROCEEDINGS
As the Company sells its products and services to a wide customer base, from
time to time it may be named in legal proceedings. The Company aggressively
reviews all claims on a timely basis and in the opinion of management, any
currently pending legal claims against the Company have no basis and no loss
contingency reserves have been established.
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 2001.
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 hereto
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, 2001, and incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in Exhibit 13 hereto
under the caption "Selected Financial Data," which information is contained
in the Company's Annual Report to Shareholders for the year ended December
31, 2001, and 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 hereto
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,
2001, and incorporated herein by reference.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in Exhibit 13 hereto
under the caption "Market and Credit Risks" in 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, 2001, and incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements together with the notes thereto are set
forth in Exhibit 13 hereto which information is contained in the Company's
Annual Report to Shareholders for the year ended December 31, 2001 and
incorporated herein by reference.
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Operations for years ended December 31, 2001,
2000 and 1999
Consolidated Statements of Shareholders' Equity for years ended December
31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for years ended December 31, 2001,
2000 and 1999
Notes to the Consolidated Financial Statements
Independent Auditors' Report
Quarterly financial data for the years ended December 31, 2001 and 2000 are
set forth in Exhibit 13 hereto in Note 14 of "Notes to the Consolidated
Financial Statements" and are contained in the Company's Annual Report to
Shareholders for the year ended December 31, 2001, 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
DIRECTORS
The information required by this Item is incorporated by reference from the
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance," section of the Company's definitive proxy statement to be filed
with the SEC in connection with our 2002 Annual Meeting of Shareholders.
EXECUTIVE OFFICERS OF THE REGISTRANT
Year First
Elected As
Name Office Age Executive Officer
--------------------- ----------------------------- --- -----------------
Anthony Spier Chairman of the Board,
President & Chief
Executive Officer 57 1994
Mark E. Komorowski President of American
Gaming & Electronics 36 1994
George B. Toma Vice President of Finance,
Chief Financial Officer,
Treasurer & Corporate Secretary 34 1996
Each executive officer has served in various executive capacities with the
Company for at least the past five years.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference under the
captions "Summary Compensation Table," "Option Grants in 2001," "Aggregated
Option Exercises in 2001 and Option Values at December 31, 2001," "Report of
Board of Directors on Compensation," and "Compensation Committee Interlocks
and Insider Participation," of the Company's 2002 Annual Meeting definitive
proxy statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference under the
caption "Securities Beneficially Owned by Principal Shareholders and
Management," of the Company's 2002 Annual Meeting definitive proxy
statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Information required by this Item is incorporated by reference under the
captions "Compensation Committee Interlocks and Insider Participation," of
the Company's 2002 Annual Meeting definitive proxy statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(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 incorporated by reference or 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 and filed as Exhibit 3.2 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
10.1*. Employment Agreement dated February 29, 1996, as amended, between
the Company and Anthony Spier and incorporated herein by reference.
10.2*. 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.
10.3*. 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.
10.4*. 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 and incorporated herein by reference.
10.5. Amended and Restated Sales Representative Agreement dated December
9, 1998 and Amendment 1 dated August 30, 1999, filed as Exhibits 10.1 of the
Company's Form 10-Q dated November 10, 1999 and incorporated herein by
reference.
10.6. Voting Rights Agreement dated December 9, 1998 and Amendment 1
dated August 30, 1999, among the Company, Anthony Spier, John R. Blouin,
James J. Roberts, Jr. and James Industries, Inc., filed as Exhibits 10.3 of
the Company's Form 10-Q dated November 10, 1999 and incorporated herein by
reference.
10.7. Acquisition of Certain Assets of American Gaming and Electronics
dated January 12, 2000, filed as Exhibits 2.1, 2.2 and 2.3 on Form 8-K,
dated January 27, 2000 and incorporated herein by reference.
10.8. Executive Stock Award Plan, filed as Exhibits 4.1 and 4.2 of the
Company's Form S-8, dated May 12, 2000 and incorporated by reference.
10.9 Credit Agreements dated August 31, 2001, between American National
Bank and Trust Company and the Company, filed as Exhibits 10.1 of the
Company's Form 10-Q dated November 14, 2001 and incorporated herein by
reference.
10.10. License Agreement dated July 1, 2000, between the Company and RCA
Corporation filed as Exhibit 10.10 of the Company's Annual Report on Form
10-K for the year ended December 31, 2000 and incorporated herein by
reference.
10.11. Agreement dated July 3, 2000, between the Company and Local 1031,
I.B.E.W., AFL-CIO filed as Exhibit 10.11 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 and incorporated herein by
reference.
13. Company's Annual Report to Shareholders for the year ended December
31, 2000 as specified in Part II hereof.
23. Consent of KPMG LLP.
*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, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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
& Chief Executive Officer February 11, 2002
/S/ GEORGE B. TOMA
-----------------------
George B. Toma CPA, CMA Vice President of Finance,
Chief Financial Officer,
Treasurer & Corporate Secretary February 11, 2002
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
& Chief Executive Officer February 11, 2002
/S/ MARSHALL L. BURMAN
-----------------------
Marshall L. Burman Director February 11, 2002
/S/ JERRY KALOV
-----------------------
Jerry Kalov Director February 11, 2002
/S/ FRANK R. MARTIN
-----------------------
Frank R. Martin Director February 11, 2002
/S/ MARK L. YOSELOFF
-----------------------
Mark L. Yoseloff Director February 11, 2002
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.
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
---- --------- --------- ---------- -------------
1999 $85,000 $36,000 $61,000 $60,000
2000 $60,000 $44,000 $34,000 $70,000
2001 $70,000 $134,000 $74,000 $130,000
(1) Provision for bad debt.
(2) Accounts receivable written off against the allowance.