Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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[X]
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2011.
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or
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[ ]
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to ____________
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Commission File Number 1-8250
WELLS-GARDNER ELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
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Illinois
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36-1944630
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.)
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9500 West 55th Street, Suite A, McCook, Illinois
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60525-3605
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(Address of principal executive offices)
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(Zip Code)
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(708) 290-2100
(Registrant's telephone number, including area code)
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.
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YES
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ý
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NO
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o
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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YES
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ý
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NO
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o
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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o
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Smaller reporting company
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ý
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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YES
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o
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NO
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ý
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As of November 4, 2011 approximately 11,602,000 shares of the Common Stock, $1.00 par value of the registrant were outstanding.
WELLS-GARDNER ELECTRONICS CORPORATION
For The Three Months and Nine Months Ended September 30, 2011
PART I – FINANCIAL INFORMATION
Financial Statements:
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Condensed Consolidated Statements of Earnings (unaudited)
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-
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Three Months and Nine Months Ended September 30, 2011 & 2010
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Condensed Consolidated Balance Sheets
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-
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September 30, 2011 & 2010 (unaudited) & December 31, 2010
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Condensed Consolidated Statements of Cash Flows (unaudited)
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-
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Three Months and Nine Months Ended September 30, 2011 & 2010
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Notes to the Unaudited Condensed Consolidated Financial Statements
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Management's Discussion & Analysis of Financial Condition & Results of Operations
Quantitative & Qualitative Disclosures about Market Risk
Controls & Procedures
Legal Proceedings
Risk Factors
Exhibits
-2-
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WELLS-GARDNER ELECTRONICS CORPORATION
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Condensed Consolidated Statements of Earnings (unaudited)
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Three Months and Nine Months Ended September 30, 2011 and 2010
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Three Months Ended
September 30
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Nine Months Ended
September 30
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2011
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2010
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2011
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2010
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Net sales
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$ | 9,759,000 | $ | 11,031,000 | $ | 33,716,000 | $ | 37,995,000 | ||||||||
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Cost of sales
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8,000,000 | 9,070,000 | 27,356,000 | 31,073,000 | ||||||||||||
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Gross margin
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1,759,000 | 1,961,000 | 6,360,000 | 6,922,000 | ||||||||||||
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Engineering, selling & administrative expenses
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1,889,000 | 2,096,000 | 6,060,000 | 6,403,000 | ||||||||||||
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Operating Earnings
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(130,000 | ) | (135,000 | ) | 300,000 | 519,000 | ||||||||||
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Interest expense
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30,000 | 45,000 | 92,000 | 156,000 | ||||||||||||
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Other (income), net
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0 | (1,000 | ) | 0 | (1,000 | ) | ||||||||||
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Income tax (benefit) expense
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(8,000 | ) | (3,000 | ) | 0 | (6,000 | ) | |||||||||
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Net (Loss) Earnings
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$ | (152,000 | ) | $ | (176,000 | ) | $ | 208,000 | $ | 370,000 | ||||||
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Earnings per share:
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Basic (loss) earnings per share
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$ | (0.01 | ) | $ | (0.02 | ) | $ | 0.02 | $ | 0.03 | ||||||
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Diluted (loss) earnings per share
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$ | (0.01 | ) | $ | (0.02 | ) | $ | 0.02 | $ | 0.03 | ||||||
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Basic average common shares outstanding
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11,602,233 | 11,535,480 | 11,589,108 | 11,530,289 | ||||||||||||
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Diluted average common shares outstanding
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11,608,361 | 11,542,984 | 11,595,844 | 11,537,891 | ||||||||||||
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See accompanying notes to the unaudited condensed consolidated financial statements
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-3-
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WELLS-GARDNER ELECTRONICS CORPORATION
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Condensed Consolidated Balance Sheets
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September 30,
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September 30,
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December 31,
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2011
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2010
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2010
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(unaudited)
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(unaudited)
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Assets:
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Current assets
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Cash
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$ | 220,000 | $ | 221,000 | $ | 29,000 | ||||||
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Accounts receivable, net
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6,009,000 | 6,858,000 | 4,761,000 | |||||||||
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Accounts receivable, subcontractor
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4,703,000 | 4,507,000 | 2,956,000 | |||||||||
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Inventory
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10,358,000 | 8,582,000 | 8,600,000 | |||||||||
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Other current assets
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752,000 | 1,081,000 | 676,000 | |||||||||
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Total current assets
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$ | 22,042,000 | $ | 21,249,000 | $ | 17,022,000 | ||||||
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Property, plant & equipment, net
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302,000 | 303,000 | 421,000 | |||||||||
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Other assets:
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Deferred tax asset, net
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177,000 | 177,000 | 177,000 | |||||||||
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Goodwill
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1,329,000 | 1,329,000 | 1,329,000 | |||||||||
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Total other assets
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1,506,000 | 1,506,000 | 1,506,000 | |||||||||
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Total assets
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$ | 23,850,000 | $ | 23,058,000 | $ | 18,949,000 | ||||||
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Liabilities:
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Current liabilities
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Accounts payable
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$ | 915,000 | $ | 1,201,000 | $ | 878,000 | ||||||
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Accounts payable, subcontractor
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3,570,000 | 4,057,000 | 1,165,000 | |||||||||
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Accrued expenses
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1,119,000 | 1,361,000 | 892,000 | |||||||||
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Total current liabilities
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$ | 5,604,000 | $ | 6,619,000 | $ | 2,935,000 | ||||||
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Long-term liabilities:
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Note payable
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2,525,000 | 827,000 | 565,000 | |||||||||
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Total liabilities
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$ | 8,129,000 | $ | 7,446,000 | $ | 3,500,000 | ||||||
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Shareholders' Equity:
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Common stock*: authorized 25,000,000 shares
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$1.00 par value; shares issued and outstanding:
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11,602,233 shares as of September 30, 2011
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11,537,630 shares as of September 30, 2010
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11,537,630 shares as of December 31, 2010
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$ | 11,602,000 | $ | 10,988,000 | $ | 10,988,000 | ||||||
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Additional paid-in capital
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5,051,000 | 5,515,000 | 5,515,000 | |||||||||
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Accumulated deficit
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(709,000 | ) | (737,000 | ) | (916,000 | ) | ||||||
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Unearned compensation
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(223,000 | ) | (154,000 | ) | (138,000 | ) | ||||||
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Total shareholders' equity
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15,721,000 | 15,612,000 | 15,449,000 | |||||||||
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Total liabilities & shareholders' equity
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$ | 23,850,000 | $ | 23,058,000 | $ | 18,949,000 | ||||||
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See accompanying notes to the unaudited condensed consolidated financial statements
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*Common Stock has been adjusted to reflect 5% stock dividend paid on 3/31/2011.
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-4-
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WELLS-GARDNER ELECTRONICS CORPORATION
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Condensed Consolidated Statements of Cash Flows (unaudited)
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Three Months and Nine Months Ended September 30, 2011 and 2010
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Three Months Ended
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Nine Months Ended
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Sept 30,
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Sept 30,
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Sept 30
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Sept 30
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2011
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2010
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2011
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2010
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Cash flows from operating activities:
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Net (loss) earnings
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$ | (152,000 | ) | $ | (176,000 | ) | $ | 208,000 | $ | 370,000 | ||||||
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Adjustments to reconcile net (loss) earnings to
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net cash provided by (used in) operating activities:
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Depreciation and amortization
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53,000 | 35,000 | 162,000 | 103,000 | ||||||||||||
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Bad debt (recovery) expense
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(20,000 | ) | 27,000 | (54,000 | ) | 42,000 | ||||||||||
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Amortization of unearned compensation
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22,000 | 18,000 | 62,000 | 55,000 | ||||||||||||
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Changes in current assets & liabilities
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Accounts receivable
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3,042,000 | 4,967,000 | (1,194,000 | ) | 248,000 | |||||||||||
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Inventory
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310,000 | (69,000 | ) | (1,758,000 | ) | (574,000 | ) | |||||||||
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Prepaid expenses & other
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95,000 | (418,000 | ) | (76,000 | ) | (1,000 | ) | |||||||||
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Accounts payable
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(1,006,000 | ) | (114,000 | ) | 37,000 | (144,000 | ) | |||||||||
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Due to/from subcontractor
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(509,000 | ) | 759,000 | 658,000 | 1,390,000 | |||||||||||
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Accrued expenses
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114,000 | 45,000 | 227,000 | 68,000 | ||||||||||||
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Net cash provided by (used in) operating activities
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$ | 1,949,000 | $ | 5,074,000 | $ | (1,728,000 | ) | $ | 1,557,000 | |||||||
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Cash used in investing activities:
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Additions to plant & equipment, net
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(22,000 | ) | (86,000 | ) | (43,000 | ) | (141,000 | ) | ||||||||
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Net cash used in investing activities
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$ | (22,000 | ) | $ | (86,000 | ) | $ | (43,000 | ) | $ | (141,000 | ) | ||||
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Cash (used in) provided by financing activities:
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(Repayments) Borrowings - note payable
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(1,897,000 | ) | (4,986,000 | ) | 1,960,000 | (1,351,000 | ) | |||||||||
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Proceeds from shares issued, options exercised and purchase plan
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0 | 5,000 | 2,000 | 25,000 | ||||||||||||
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Net cash (used in) provided by financing activities
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$ | (1,897,000 | ) | $ | (4,981,000 | ) | $ | 1,962,000 | $ | (1,326,000 | ) | |||||
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Net increase in cash
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30,000 | 7,000 | 191,000 | 90,000 | ||||||||||||
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Cash at beginning of period
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190,000 | 214,000 | 29,000 | 131,000 | ||||||||||||
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Cash at end of period
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$ | 220,000 | $ | 221,000 | $ | 220,000 | $ | 221,000 | ||||||||
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Supplemental cash flow disclosure:
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Interest paid
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30,000 | 46,000 | 92,000 | 156,000 | ||||||||||||
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Taxes paid
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(3,000 | ) | 4,000 | 6,000 | 1,000 | |||||||||||
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See accompanying notes to the unaudited condensed consolidated financial statements
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-5-
WELLS-GARDNER ELECTRONICS CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements
1. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the financial position and results of operations for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company's 2010 Annual Report to Shareholders. The results of operations for the three months and nine months ended September 30, 2011 are not necessarily indicative of the operating results for the full year.
2. On February 24, 2011, the Company declared a five percent (5%) stock dividend payable to all common stock shareholders of record on March 15, 2011. The dividend was paid on March 31, 2011. For all periods presented, the earnings per share have been retroactively restated to reflect the stock dividend.
3. Basic earnings per share are based on the weighted average number of shares outstanding whereas diluted earnings per share include the dilutive effect of unexercised common stock equivalents. Potentially dilutive securities are excluded from diluted earnings per share calculations for periods with a net loss. For all periods reported, the earnings per share have been retroactively restated to reflect the stock dividends issued in 2010 and 2011.
4. The Company maintains an Incentive Stock Option and Stock Award Plan under which officers and key employees may acquire up to a maximum of 2,052,408 common shares.
Stock Options
The Company’s Stock Option Plan ended on December 31, 2008. Options were granted through December 31, 2008 at an option price not less than fair market value on the date of grant and are exercisable not earlier than six months nor later than ten years from the date of grant. Options vest over two and three year periods. As of September 30, 2011, 5 persons held outstanding options and were eligible to participate in the plan. Such options expire on various dates through April 8, 2014.
Under the stock option plan, the exercise price of each option equals the market price of the Company’s stock on the date of grant. For purposes of calculating the compensation cost consistent with GAAP USA guidelines, the fair value of each grant was estimated on the date of grant using the Black-Scholes option-pricing model. The Company has not issued any Incentive Stock Options since 2004, except for adjustments to previous grants for the 5% stock dividend declared in subsequent years. It is the Company’s policy to issue new stock certificates to satisfy stock option exercises.
-6-
The following table summarizes information about stock options outstanding for the nine months ending September 30, 2011:
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Shares
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Weighted
Average
Exercise Price
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Weighted Average
Remaining
Contractual Life
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Aggregate
Intrinsic
Value
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Outstanding at beginning of year
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34,365
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$1.79
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Granted
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0
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$0.00
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Forfeited
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0
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$0.00
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Exercised
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(1,843)
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$1.39
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Outstanding, September 30, 2011
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32,522
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$1.81
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1.4
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$18,000
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Exercisable, September 30, 2011
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32,522
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$1.81
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1.4
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$18,000
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Restricted Shares
The employees will earn the restricted shares in exchange for services to be provided to the Company over a three year or five-year vesting period. All shares granted are governed by the Company’s Stock Award Plan, which was approved by shareholders in 2000. As of September 30, 2011, 174,066 restricted shares are outstanding on a dividend adjusted basis. Total unrecognized compensation cost related to unvested stock awards is approximately $223,000 and is expected to be recognized over a weighted average period of 2.3 years.
The following table summarizes information regarding Restricted Share activity for the nine months ending September 30, 2011:
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Shares
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Weighted Average Grant Date
Fair Value
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Unvested at December 31, 2010
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152,460
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$1.54
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Granted
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63,000
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$2.33
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Vested
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(41,394)
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$0.99
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Forfeited
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0
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$0.00
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Unvested, September 30, 2011
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174,066
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$1.96
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5. Our inventory detail as of September 30, 2011, September 30, 2010 and December 31, 2010 was as follows:
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September 30,
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September 30,
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December 31,
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(in $000's)
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2011
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2010
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2010
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(unaudited)
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(unaudited)
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Inventory:
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Raw materials
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$
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3,544
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$
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3,239
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$
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3,097
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In transit finished goods
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1,094
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1,495
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948
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Finished goods
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5,720
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3,848
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4,555
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Total
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$
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10,358
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$
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8,582
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$
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8,600
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-7-
6. On March 4, 2011, the Company signed an amendment to extend the term of the credit agreement with Wells Fargo Bank to August 21, 2014. The credit agreement is a $12 million revolving facility. The credit facility has an interest rate of three month LIBOR plus 375 basis points, plus other fees including annual maintenance and exam fees with a minimum interest charge per month, which currently is $10,000 per month. Substantially all assets of the Company are utilized as collateral for this credit facility and the Company must maintain certain financial covenants including minimum book net worth, minimum net earnings, maximum capital expenditures and maximum compensation increases. The financial covenants were modified for 2011 to account for the investment which the Company is making into the Video Lottery market, however the financial covenants will return to their original state for fourth quarter 2011 through the third quarter 2014. The Company is in compliance with all of its covenants at September 30, 2011.
7. An income tax valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The net change in the valuation allowance for the nine months ended September 30, 2011 was a decrease of $2,000 to recognize the decrease in deferred tax assets during the first nine months. The net deferred tax asset of $177,000 as of September 30, 2011 represents the Company’s belief that it is more likely than not that a profit will be generated through the end of 2012, which will allow the Company to use a portion of the current net operating loss carry forwards. As of December 31, 2010, the Company has net operating loss carry forwards for Federal income tax purposes of approximately $5,419,000, which are available to offset future Federal taxable income, if any, through 2022. The Company also has alternative minimum tax credit carry forwards of approximately $136,000, which are available to reduce future Federal regular income taxes, if any, over an indefinite period. No tax benefits are set to expire in the next twelve months that may have an impact upon the Company’s effective tax rate.
The Company files tax returns in the U.S. federal jurisdiction and various state jurisdictions. The tax years 2008, 2009 and 2010 remain open to examinations. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. During the nine months ended September 30, 2011, the Company did not recognize expense for interest or penalties related to income tax, and do not have any amounts accrued at September 30, 2011, as the Company does not believe it has taken any uncertain income tax positions.
The Company has received notification from the IRS that the audit of the 2008 and 2009 tax years has been completed with no adjustments. The Company has received notification from the state of Illinois that the state income tax audit of tax years 2008 and 2009 has been completed with no adjustments.
8. The Company terminated a Licensing Agreement with Dimension Technologies, Inc. (“DTI”) dated November 11, 2008 effective October 27, 2010, following the expiration of a 90-day notice period. On October 26, 2010 DTI made a formal demand to the American Arbitration Association naming the Company as respondent, which Arbitration Demand was served on the Company November 1, 2010. The Arbitration Demand makes reference to a breach of the Licensing Agreement, as well as misrepresentation, conversion, and unfair competition relative to the Company’s alleged use of DTI’s proprietary technology and business information and references a claim in the amount for $5,000,000.
-8-
The case is currently being heard and the Company expects resolution during the first half 2012. The Company does not believe there is any factual basis for the claims in the Arbitration Demand nor of the claim amount asserted and believes its actions in connection with the termination of the License Agreement were consistent with the terms of such agreement. The Company believes that the ultimate resolution of this proceeding will not have a material impact on the Company’s financial condition, results of operations or cash flows.
9. The Company accounts for its goodwill resulting from its purchase of American Gaming and Electronics, Inc. (AGE) in conformity with GAAP USA. GAAP USA requires that goodwill not be amortized, but instead be tested for impairment at least annually, which the Company does annually in the fourth quarter. The Company determined that there was no impairment of goodwill in 2010 and 2009 by utilization of a discounted cash flow analysis. The model utilizes numerous assumptions, including but not limited to future sales estimates of AGEs traditional products and of Video Gaming Terminals (VGTs) related to the new Illinois VGT business. Due to the nature of such estimates, there is no certainty in future periods that the Fair Value of the American Gaming & Electronics reporting unit will exceed its carrying value.
10. The Company has evaluated subsequent events through the date the financial statements were issued for the nine months ended September 30, 2011.
-9-
Item 2. Management's Discussion & Analysis of Financial Condition & Results of Operations
Three Months Ended September 30, 2011 & 2010
For the third quarter ended September 30, 2011, net sales decreased $1.3 million or 11.5% to $9,759,000 compared to $11,031,000 the third quarter 2010. Overall video display unit volume decreased 1,500 units or 6% year over year. Video display average selling price decreased 5% the third quarter this year versus third quarter last year. The total of the video display volume and selling price decreases resulted in a video display sales decrease of $1.06 million. Parts sales increased by $67,000 and used games sales decreased $279,000 in the third quarter 2011 compared to the same quarter 2010. Gaming sales for the third quarter decreased by 12% to $8.8 million from $10.07 million in the third quarter prior year due to lower video display volume in the gaming market. Amusement sales decreased by 3% to $0.94 million in the third quarter 2011 from $0.97 million in the third quarter 2010 due to relatively flat amusement sales.
Gross margin for the third quarter 2011 decreased $202,000 to $1,759,000 or 18.0% of sales compared to $1,961,000 or 17.8% in the third quarter 2010 for a 0.2 percentage point margin improvement. The $202,000 gross margin net decline was the result of a $226,000 margin reduction due to lower unit volume partially offset by a $24,000 margin increase due to favorable material usage variance. The company is concentrating on new parts lines with improved margins and continues to introduce new lower cost video display products for all markets.
Operating expenses decreased by $207,000 in the third quarter 2011 compared to the same quarter 2010. Due to lower sales, operating expenses as a percent of sales increased to 19.4% in the quarter from 19.0% of sales in the same quarter last year. Operating expenses decreased $4,000 in the third quarter compared to the same period the prior year to support the new video lottery business, while operating expenses for the base manufacturing and distribution businesses decreased by $203,000. The base business other operating expenses decreases were primarily due to a sizable decrease in compensation, professional fees, and bad debt expenses and a patent expense credit partially offset by high litigation and sales commission expenses. The Company continues to control its headcount and to place emphasis on operating expense control.
Operating loss decreased by $5,000 to a $(130,000) in the third quarter 2011 compared to loss of $(135,000) in the third quarter 2010 despite lower sales and gross margin due to lower operating expenses. Operating income would have been $125,000 greater or about breakeven had the Company not made the investments in the Illinois Video Gaming Terminal (VGT) market.
Interest expense was $30,000 in the third quarter 2011 compared to $45,000 in the third quarter 2010 due to lower minimum interest payments. Other expense was essentially zero in the third quarter 2011 and the third quarter 2010.
Income tax expense was a $8,000 credit in the third quarter 2011 compared to $3,000 credit in the third quarter 2010.
Net loss decreased $24,000 to $(152,000) loss in the third quarter 2011 compared to a $(176,000) loss in the third quarter 2010. For the third quarter 2011 basic and diluted earnings per share was $(0.01) compared to basic and diluted earnings per share of $(0.02) in the third quarter 2010.
-10-
Nine Months Ended September 30, 2011 & 2010
For the nine months ended September 30, 2011, net sales decreased $4.3 million or 11.3% to $33,716,000 compared to $37,995,000 for the nine months 2010. Overall video display unit volume decreased 10,500 units or 12% year over year. Video display average selling price increased 1% year over year in the nine months. The net of the video display volume decrease and selling price increase resulted in a video display sales decrease of $3.6 million. Parts sales increased by $150,000 and used games sales decreased $0.8 million in the nine months 2011 compared to the same nine months 2010. Gaming sales for the nine months decreased by 15% to $30.4 million from $35.7 million in the nine months prior year due to lower video display volume in the gaming market. Amusement sales increased by 43% to $3.33 million in the nine months 2011 from $2.3 million in the nine months 2010 due to higher sales to one OEM customer and one distribution customer. As a result, gaming sales accounted for 90% of total sales and amusement sales accounted for 10% of total sales in the nine months 2011 compared to 94% and 6% respectively in the nine months 2010.
Gross margin for the first nine months 2011 decreased $562,000 to $6,360,000 or 18.9% of sales compared to $6,922,000 or 18.2% in the nine months 2010 resulting in 0.7 percentage point increase in gross margin. The $562,000 gross margin net decline was the result of a $780,000 margin reduction due to lower unit volume partially offset by a $218,000 margin increase due to favorable material usage variance and lower royalty expense. The company continues to concentrate on new parts lines with improved margins and to introduce new lower cost video display products for all markets.
Operating expense decreased by $343,000 in the nine months 2011 compared to the nine months 2010. Due to lower sales, operating expenses as a percent of sales increased to 18.0% in the nine months from 16.9% of sales in the nine months last year. Operating expenses increased $23,000 in the nine months compared to the same period the prior year to support the new video lottery business, while operating expenses for the base manufacturing and distribution businesses decreased by $366,000. The base operating expenses decrease were due to sizeable reductions in compensation, severance, professional fee, engineering sample, and bad debt expenses partially offset by high litigation expense. The Company continues to control its headcount and to place emphasis on operating expense control.
Operating income decreased by $219,000 to $300,000 in the nine months 2011 compared to income of $519,000 in the nine months 2010 due to lower sales and gross margin partially offset by lower operating expenses. Operating income would have been $391,000 greater had the Company not made the investments in the Illinois VGT market.
Interest expense was $92,000 in the nine months 2011 compared to $156,000 in the nine months 2010 due to lower minimum interest per month. Other expense was essentially zero in the nine months 2011 and the nine months 2010.
Income tax expense was a zero in the nine months 2011 compared to $6,000 credit in the nine months 2010.
Net income decreased $162,000 to $208,000 in the nine months 2011 compared to $370,000 income in the nine months 2010. For the nine months 2011 basic and diluted earnings per share was $0.02 compared to basic and diluted earnings per share of $0.03 in the nine months 2010.
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Outlook
The Company expects sales for the full year 2011 will be in the range of $43 to $45 million, compared to $45.7 million in 2010, as the worldwide gaming slot machine market remains sluggish. Fourth quarter sales are expected to increase from prior year sales of $7.7 million by between 20 and 40 percent. However earnings will continue to be affected by spending for the Illinois VGT market without revenue. The VGT central server system needs to be awarded and implemented and the operators and licensed liquor establishments need to be gaming licensed before sales begin. The Company currently is estimating that first sales for the Illinois Video Gaming Terminal business will begin in the third quarter 2012. The Company expects sales for the full year 2012 will be in the range of $60 to $70 million using this expected start date for the Illinois Video Gaming business. We will continue to aggressively control costs, inventory levels and interest expenses.
Liquidity & Capital Resources
Cash provided by operating activities during the third quarter ended September 30, 2011 was $1,949,000.
Net loss plus non cash adjustments for the third quarter 2011 was $97,000. Accounts receivable decreased by $3,042,000 in the third quarter to $6,009,000 on September 30, 2011 due to significantly lower sales the third quarter 2011 compared to the second quarter 2011. Accounts receivable days outstanding decreased to 56 days on September 30, 2011 from 62 days on June 30, 2011. Inventory decreased by $310,000 to $10,358,000 on September 30, 2011. Inventory should have declined more due to lower finished goods inventory but was partially offset by higher subcontractor LCD panel inventory to protect future sales. As a result, days in inventory increased to 118 days at September 30, 2011 compared to 93 days on June 30, 2011. Prepaid expenses decreased by $95,000 during the third quarter 2011. Accounts payable days outstanding decreased to 35 days on September 30, 2011 from 60 days on June 30, 2011 resulting in accounts payable decrease of $1,006,000 for the quarter. Due from subcontractors increased more than due to subcontractors by $509,000 in the third quarter 2011 due to lower production volume partially offset by higher subcontractor LCD panel inventory. Accrued expenses increased by $114,000 in the third quarter.
During the third quarter 2011, cash used by investing activities was $22,000 primarily for the purchase of IT phone equipment.
Long-term notes payable decreased $1,897,000 to $2,525,000 on September 30, 2011 from $4,422,000 on June 30, 2011. Proceeds from options exercised were zero during the third quarter 2011. Payments on long-term notes payable resulted in $1,897,000 of cash used in financing activities.
Cash increased $30,000 from June 30, 2011 to $220,000 as of September 30, 2011.
Cash used in operating activities during the nine months ended September 30, 2011 was $1,728,000.
Earnings plus non cash adjustments for the nine months ended September 30, 2011 were $378,000. Accounts receivable increased by $1,194,000 in the nine months ended September 30, 2011 to $6,009,000 on September 30, 2011 due to higher sales in the third quarter 2011 compared to the fourth quarter 2010. Accounts receivable days outstanding remained the same at 56 days on September 30, 2011 compared to 56 days on December 31, 2010. Inventory increased by $1,758,000 to $10,358,000 on September 30, 2011.
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The primary cause of the inventory increase was investing in LCD panel inventory to protect future sales and higher in transit finished goods. However due to higher sales in the third quarter 2011 compared to the fourth quarter 2010, days in inventory decreased slightly to 118 days at September 30, 2011 compared to 125 days on December 31, 2010. Prepaid expenses decreased by $76,000 during the nine months ended September 30, 2011. Accounts payable days outstanding decreased by $37,000 to 35 days on September 30, 2011 from 39 days on December 31, 2010 due to higher sales volume the third quarter 2011 compared to fourth quarter last year. Due to subcontractors increased more than due from subcontractors by $658,000 in the nine months ended September 30, 2011 due to production increases in 2011 off a very low fourth quarter 2010. Accrued expenses increased by $227,000 in the nine months 2011.
During the nine months ended September 30, 2011, cash used by investing activities during the quarter was $43,000 primarily for the purchase of IT phone equipment and showroom accessories to support the Illinois VGT business.
Long-term notes payable increased $1,960,000 to $2,525,000 on September 30, 2011 from $565,000 on December 31, 2010. Proceeds from options exercised were $2,000 during the nine months ended September 30, 2011. These proceeds resulted in $1,962,000 of cash provided by financing activities.
Cash increased $191,000 from December 31, 2010 to $220,000 as of September 30, 2011.
The Company is subject to certain market risks, mainly interest rates. On August 21, 2006, the Company entered into a four-year $15 million revolving credit facility with Wells Fargo Bank NA. The Company must maintain certain financial covenants including minimum book net worth, minimum net earnings, maximum capital expenditures and maximum compensation increases. Substantially all assets of the Company are utilized as collateral for this credit facility. On September 15, 2010, the Company amended the term of the credit agreement extending it three years to August 21, 2013. The amended credit agreement reduced the revolving credit facility from $15 million to $12 million. The financial covenants, which remained the same, now include a provision that any future write off of goodwill will be an add back to the net worth and earnings covenants. On March 04, 2011, the Company signed an amendment to extend the term of the credit agreement with Wells Fargo Bank one year to August 21, 2014. The amended credit facility has an interest rate of three month LIBOR plus 375 basis points, plus other fees including annual maintenance and exam fees. In addition, the Company pays $31,000 credit insurance on selected foreign receivables. The financial covenants were modified for 2011 to account for the investment which the Company is making into the Video Lottery market, however the financial covenants will return to their original amounts December 31, 2011 through August, 2014. An adverse change in interest rates during the time that this debt is outstanding would cause an increase in the amount of interest paid. As of September 30, 2011, the Company had total outstanding bank debt of $2.5 million at an average interest rate of 4.125%.
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There have been no material changes to the Company’s market risk during the three months and nine months ended September 30, 2011. For additional information on market risk, refer to the “Quantitative and Qualitative Disclosures about Market Risk” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
The Company is subject to certain market risks, mainly interest rate risk. In August 2006, the Company entered into a four-year secured credit facility with Wells Fargo Bank. In September 2010, the Company entered into a three-year extension of the credit facility. On March 4, 2011, the Company entered into an additional one year extension of the credit facility.
As of September 30, 2011, the Company had total outstanding bank debt of $2.5 million at an average interest rate of 4.125%. The loan is at three month Libor plus 3.75% with a minimum interest charge of $10,000 per month. All of the Company’s debt is subject to variable interest rates at this time. An adverse change in interest rates during the time that this debt is outstanding would cause an increase in the amount of interest paid. If the debt would exceed approximately $2.93 million, then a 100 basis point increase in interest rates would result in additional interest expense recognized in the financial statements. The Company may make payments towards the loans at any time without penalty. However, there is a minimum interest charge of $10,000 per month through August 2012 which reduces to $5,000 per month through August 2013.
The Company is exposed to credit risk on certain assets, primarily accounts receivable. The currency risk is minimal as substantially all of the Company’s sales are billed in US dollars. The Company provides credit to customers in the ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited except for the Company’s two largest customers.
The Company has established a Disclosure Committee, which is made up of the Company’s Chief Executive Officer, Chief Financial Officer and other members of management. The Disclosure Committee conducts an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. While the Company has limited resources and cost constraints due to its size, based on the evaluation required by Rule 13a-15(b), the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them. As of September 30, 2011, there have been no known significant changes in internal controls or in other factors that could significantly affect these controls.
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New Accounting Pronouncements
NONE
Forward Looking Statements
Because the Company wants to provide shareholders and potential investors with more meaningful and useful information, this report may contain 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, which are more fully described in our Securities and Exchange Commission Form 10-K filing. The Company undertakes no, and hereby disclaims any, 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.
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1) A Licensing Agreement between the Company and Dimension Technologies, Inc. ("DTI"), dated November 11, 2008 (the "Licensing Agreement"), was terminated by the Company effective on October 27, 2010, following the expiration of a 90-day notice period. On October 26, 2010, DTI made a formal demand to the American Arbitration Association (the "Arbitration Demand") naming the Company as respondent, which Arbitration Demand was served on the Company on November 1, 2010 . The Arbitration Demand makes reference to a breach of the Licensing Agreement, as well as misrepresentation, conversion, and unfair competition relative to the Company's alleged use of DTI's proprietary technology and business information and references a claim in the amount of $5,000,000.
In December, 2010 an arbitrator was chosen. There have been six arbitration conferences to date. The arbitrator has designated May 2011 through early January 2012 for mutual discovery and has set a hearing date for mid February 2012. During the most recent conference the parties have agreed upon the items open for discovery and the persons to be deposed.
The Company does not believe there is any factual basis for the claims in the Arbitration Demand nor of the claim amount asserted and believes its actions in connection with the termination of the License Agreement were consistent with the terms of such agreement. The Company believes that the ultimate resolution of this proceeding will not have a material impact on the Company's financial condition, results of operations, or cash flows.
There have been no material changes to the description of the risk factors associated with the Company's business previously disclosed in Part I, Item 1 "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2010. In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in the Company's Annual Report on Form 10-K as they could materially affect our business, financial condition and future results. The risks described in the Company's Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known, or that are currently deemed to be immaterial, also may materially and adversely affect the Company's business, financial condition or operating results.
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(a).
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Exhibits:
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Exhibit 31.1
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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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Exhibit 31.2
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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Exhibit 32.1
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Statement of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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Exhibit 101.INS
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XBRL Instance Document
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Exhibit 101.SCH
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XBRL Taxonomy Extension Schema
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Exhibit 101.CAL
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XBRL Taxonomy Extension Calculation Linkbase
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Exhibit 101.DEF
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XBRL Taxonomy Extension Definition Linkbase
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Exhibit 101.LAB
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XBRL Taxonomy Extension Label Linkbase
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Exhibit 101.PRE
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XBRL Taxonomy Extension Presentation Linkbase
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(b).
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Press Releases:
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The following press releases have been issued by the Company during the Company’s nine months 2011, which are available on the Company’s website (www.wellsgardner.com) under its Investor Information section:
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DATE
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TITLE
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02/16/11
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02/18/11
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Wells-Gardner Announces Investor Presentation at the Roth Capital Partners Growth Stock Conference in Laguna Niguel, California
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03/04/11
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/ CORRECTION - Wells-Gardner Announces Stock Dividend
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05/04/11
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Wells-Gardner Reports First Quarter Earnings
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06/21/11
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Wells-Gardner Reports Sale of 500,000th LCD Display
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07/12/11
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Illinois Supreme Court Has Upheld Legality of Capital Spending Bill and Therefore the Illinois Video Lottery Business
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08/10/11
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Wells-Gardner Reports Second Quarter and First Half 2011 Earnings
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08/11/11
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Wells-Gardner's American Gaming & Electronics Subsidiary Received an Illinois Video Gaming Terminal Distributors License
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Pursuant to the requirements 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.
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WELLS-GARDNER ELECTRONICS CORPORATION
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Date:
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November 10, 2011
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By:
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James F. Brace
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Executive Vice President,
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Chief Financial Officer,
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Treasurer & Corporate Secretary
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