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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the period ended
June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from
____________________ To ____________________
Commission File Number: 1-8984
WEDGESTONE FINANCIAL
(Exact Name of Registrant as Specified in its Charter)
Massachusetts 04-26950000
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
5200 N. Irwindale Avenue
Suite 168
Irwindale, California 91706
(818) 338-3555
(Address, including zip code and telephone number, including
area code of registrant's principal executive offices)
---------------------------
Indicate by check mark whether the registrant has (1) 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 such shorter period that the registrant was required
to file such reports and (2) has been subject to filing
requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
[ X ] Yes [ ] No
Shares of Beneficial Interest Outstanding as of August 12. 1996: 21,885,668
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<PAGE>
WEDGESTONE FINANCIAL & SUBSIDIARIES
Form 10-Q
June 30, 1996
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets - June 30, 1996 (unaudited) and
December 31, 1995............................................... 2
Consolidated Statements of Operations (unaudited) for
the Three Months and Six Months Ended June 30, 1996 and 1995.... 3
Consolidated Statements of Shareholders' Equity (unaudited) for
the Three Months and Six Months Ended June 30, 1996 and 1995.... 4
Consolidated Statements of Cash Flows (unaudited) for
the Three Months and Six Months Ended June 30, 1996 and 1995.... 5
Notes to Unaudited Consolidated Financial Statements............ 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 8
PART II OTHER INFORMATION
Item 1 Legal Proceedings.............................................. 10
Item 2 Changes in Securities.......................................... 10
Item 3 Defaults upon Senior Securities................................ 10
Item 4 Submission of Matters to a Vote of Security Holders............ 10
Item 5 Other Information.............................................. 10
Item 6 Exhibits and Reports on Form 8-K............................... 10
Signatures....................................................................11
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<PAGE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 1996 and December 31, 1995
(Amounts in Thousands - except share data)
(Unaudited)
ASSETS 1996 1995
--------- ---------
Current Assets:
Cash $ 457 $ 242
Accounts and other receivables - (net of allowances
of $192 and $196 in 1996 and 1995, respectively) 7,371 5,146
Inventories 3,943 3,021
Prepaid expenses and other assets 499 372
Deferred income taxes 476 476
-------- --------
Total Current Assets 12,746 9,257
-------- --------
Notes receivable - net 84 84
Real estate acquired by foreclosure - net 1,086 1,091
Property, plant and equipment - net 2,996 3,248
Goodwill 152 173
Deferred income taxes 2,062 2,114
Net assets of discontinued operations -- 295
Other assets 304 343
-------- --------
6,684 7,348
-------- --------
Total Assets $ 19,430 $ 16,605
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,288 $ 1,406
Accounts payable 3,786 2,739
Accrued payroll and related expenses 595 501
Other accrued expenses 1,419 809
-------- --------
Total Current Liabilities 7,088 5,455
Long-term debt 6,157 5,403
Net liabilities of discontinued operations -- --
-------- --------
Total Liabilities 13,245 10,858
Commitments and contingencies
Shareholders' Equity:
Shares of Beneficial Interest-par value
$1.00 per share: authorized - unlimited shares:
issued and outstanding - 21,885,668 shares 21,886 21,886
Additional paid-in capital 31,396 31,396
Accumulated deficit (47,097) (47,535)
-------- --------
Total Shareholders' Equity 6,185 5,747
-------- --------
Total Liabilities and Shareholders' Equity $ 19,430 $ 16,605
======== ========
See notes to consolidated financial statements.
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<PAGE>
<TABLE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
(Amounts in Thousands - except per share data)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 11,840 $ 9,652 $ 21,623 $ 18,929
Cost of sales 7,621 6,106 14,125 12,531
-------- -------- -------- --------
Gross profit 4,219 3,546 7,498 6,398
Selling, general and administrative expenses 2,863 2,382 5,308 4,661
-------- -------- -------- --------
Operating income 1,356 1,164 2,190 1,737
Goodwill amortization 11 11 22 22
Interest expense 234 182 453 397
-------- -------- -------- --------
Income before taxes 1,111 971 1,715 1,318
Provision for income taxes 195 134 273 226
-------- -------- -------- --------
Income from continuing operations 916 837 1,442 1,092
Net loss from discontinued operations (net of income tax benefit of
$408 and $135 in 1996 and 1995, respectively) (289) (101) (667) (221)
Loss on disposition (net of income tax benefit of $367) (337) -- (337) --
-------- -------- -------- --------
Net income $ 290 $ 736 $ 438 $ 871
======== ======== ======== ========
Net income (loss) per share of Beneficial Interest:
Income from continuing operations $ .04 $ .04 $ .07 $ .05
Net loss from discontinued operations (.03) (.01) (.05) (.01)
-------- -------- -------- --------
Net income $ .01 $ .03 $ .02 $ .04
======== ======== ======== ========
Weighted average number of shares outstanding:
Shares of Beneficial Interest 21,886 21,786 21,886 21,700
======== ======== ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1996 and 1995
(Unaudited)
(Amounts in Thousands)
<CAPTION>
Additional
Shares of Beneficial paid-in Accumulated
Interest capital deficit Total
-------------------- ---------- ----------- -----
Shares Amount
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 20,386 $ 20,386 $ 32,376 ($49,380) $ 3,382
Issuance of shares of beneficial interest to
secure third party debt guarantee 1,200 1,200 (840) 360
Issuance of shares of beneficial interest in
exchange for acquisition services 200 200 (140) 60
Issuance of Shares of beneficial interest to
to pay off outstanding debt 100 100 100
Net Income 871 871
-------- -------- -------- -------- --------
Balance at June 30, 1995 21,886 $ 21,886 $ 31,396 ($48,509) $ 4,773
======== ======== ======== ======== ========
Balance at December 31, 1995 21,886 $ 21,886 $ 31,396 ($47,535) $ 5,747
Net income 438 438
-------- -------- -------- -------- --------
Balance at June 30, 1996 21,886 $ 21,886 $ 31,396 ($47,097) $ 6,185
======== ======== ======== ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
(Amounts in Thousands)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 290 $ 736 $ 438 $ 871
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 232 205 442 395
Net Losses on discontinued operations 591 101 969 221
Losses on disposal of assets (net) 3 -- 3 --
Deferred income taxes 52 -- 52 --
Changes in operating assets and liabilities:
Accounts and other receivables (1,295) (910) (2,225) (1,307)
Inventories (574) (314) (922) 9
Prepaid expenses and other current assets (47) (68) (127) (88)
Accrued payroll and related expenses 10 107 93 (20)
Other accrued expenses 143 (49) (64) (21)
Accounts payable 566 203 1,047 449
Other assets (1) (120) (1) (129)
------- ------- ------- -------
Net cash used in operating activities (30) (109) (295) 380
------- ------- ------- -------
Cash Flows from Investing Activities:
Proceeds from sale of equipment 215 -- 215 --
Proceeds from repayment of mortgage notes receivable -- -- -- 1
Capital expenditures (165) (238) (346) (960)
Investment in real estate -- (24) 5 (52)
------- ------- ------- -------
Net cash provided by (used in) investing activities 50 (262) (126) (1,011)
------- ------- ------- -------
Cash Flows from Financing Activities:
Borrowings (Repayment) of term debt (225) (23) (436) 29
Deferred financing fees paid -- (4) -- (78)
Net borrowings on revolving debt 537 430 1,072 643
------- ------- ------- -------
Net cash provided by financing activities 312 403 636 594
------- ------- ------- -------
Net increase (decrease) in cash 332 32 215 (37)
Cash at beginning of period 125 110 242 179
------- ------- ------- -------
Cash at end of period $ 457 $ 142 $ 457 $ 142
======= ======= ======= =======
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months and Six Months Ended June 30, 1996 and 1995
NOTE 1. Background and Basis of Presentation
Background - Wedgestone Financial ("Wedgestone" or the "Company") was
formed in 1980 as a real estate investment trust ("REIT") and, on August 9,
1991, filed for bankruptcy. Wedgestone's plan of reorganization (the "Plan")
became effective on August 3, 1992.
Under the guidance of its current management, Wedgestone operates in
two business segments, Automotive Products and Real Estate and Lending
activities. The automotive segment manufactures and distributes automotive
aftermarket products for the light duty truck market. Its principal products
include rear bumpers; tubular products such as grille guards, push bars, and
step bars; and various other related aftermarket products. The Company's
automotive products are marketed in traditional, original equipment, service
parts and retail automotive aftermarkets. The automotive segment manufactures
and sells its products at two locations in California, and one in Minnesota.
Sales are also made from distribution centers in Texas and Utah.
Although its primary focus has shifted toward its Automotive Products
business segment, Wedgestone's Real Estate and Lending business segment has
continued since emerging from bankruptcy in 1992. Wedgestone owns three
properties that were acquired by foreclosure. The aggregate value, net of
reserves, is approximately $1,086,000 as of June 30, 1996. Wedgestone has
outstanding loans on one property, net of reserves, of approximately $84,000 as
of June 30, 1996.
Acquisitions - Since May 1992, Wedgestone has acquired three
manufacturing operations. In June 1992, Wedgestone acquired St. James Automotive
Corp. ("St. James") in exchange for 6,795,220 shares of beneficial interest of
Wedgestone and accounted for this acquisition as a purchase. On November 18,
1994, Wedgestone acquired the Automotive Segment of Standun, Inc. ("Standun"),
which consisted of the Fey Automotive Products Division ("Fey") and Sigma
Plating Co., Inc. ("Sigma") in exchange for 6,795,223 shares of beneficial
interest of Wedgestone and the assumption of approximately $1,104,000 of
outstanding debt due to related parties of both Wedgestone and Standun, and
certain other liabilities. The shareholders of Standun owned, directly or
indirectly, approximately 48% of Wedgestone prior to the acquisition and, as a
result, this acquisition was accounted for as a "put-together" which is similar
to the pooling of interest method of accounting. On January 9, 1995 Wedgestone
acquired substantially all of the assets of Hercules Bumpers, Inc. ("Hercules").
The purchase price for the assets acquired was the assumption of certain debt
and other liabilities approximating $5.1 million. In addition, certain debt is
being guaranteed jointly and severally by Charles W. Brady ("Brady"), the former
principal shareholder of Hercules, and Chattahoochee Leasing Corporation
("CLC"), a corporation controlled by Brady. In exchange for this guarantee,
Brady received a promissory note in the amount of $300,000 and 1,200,000 shares
of beneficial interest of Wedgestone. In consideration for an agreement to pay a
liability of Hercules, CLC received a promissory note for $100,000 which was
secured by 100,000 shares of beneficial interest of Wedgestone. In June, 1995,
the Company exercised its right under the CLC Agreement and acquired the note by
issuing these shares to CLC. (See Note 3 -- Discontinued Operations)
Basis of Presentation and Principles of Consolidation - The
accompanying consolidated financial statements include the operations of
Wedgestone and its wholly owned subsidiaries and give retroactive effect to the
discontinued operations of Hercules (see Note 3). All significant intercompany
transactions have been eliminated in consolidation.
The financial statements included in this Form 10-Q have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed, or omitted, pursuant to such
rules and regulations. These financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995, and Form 8-K's issued March 5, 1996 and April 18, 1996.
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<PAGE>
The results of operations for the interim periods shown in this report
are not necessarily indicative of results to be expected for the fiscal year. In
the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair statement of such operations.
Income Per Share of Beneficial Interest - Income per share of
beneficial interest is calculated based on weighted average outstanding shares
of beneficial interest.
NOTE 2. Inventories
Inventories consist of the following: (In Thousands)
June 30, December 31,
1996 1995
------ ------
Finished goods $2,205 $1,480
Work in progress 1,062 893
Raw materials 861 785
------ ------
4,128 3,158
Less allowances (185) (137)
------ ------
$3,943 $3,021
====== ======
NOTE 3. Discontinued Operations
On March 5, 1996, the Company discontinued operations of its Hercules
manufacturing facility in Pelham, Georgia. Hercules manufactured and sold
bumpers under dealer direct and dealer oriented distributor programs. Subsequent
to March 31, 1996, on April 18, 1996, the Board of Directors authorized and
completed the sale of the Company's stock ownership in Hercules to MBC
Corporation for nominal consideration pursuant to a Stock Purchase Agreement.
Both the closure of the Pelham facility and the subsequent sale of the stock of
Hercules have been recorded as a disposal of a segment of business.
The net assets (liabilities) of discontinued operations have been
segregated in the December 31, 1995 Consolidated Balance Sheets as follows: (In
Thousands)
December 31,
1995
------------
Net Assets (Liabilities)
Current Assets $ 2,480
Current Liabilities (1,749)
Net Property Plant and Equipment 1,447
Other Assets 1,506
Noncurrent Liabilities (3,045)
-------
639
Intercompany Receivable (Payable)
with Wedgestone Automotive Corp (344)
-------
$ 295
=======
Operating results of discontinued operations have been reclassified
from amounts previously reported and have been reported separately in the
consolidated statements of earnings. Net sales from discontinued operations from
January 1, 1996 through the sale date of April 18, 1996, were $1,325,000, and
$5,866,000 for the six months ended June 30, 1995.
-7-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Wedgestone (the "Company") is primarily engaged in the business of
manufacturing automotive products for the light duty truck aftermarket. The
Company has two plants in California and one in Minnesota. It markets its
products under various tradenames including Fey, Westin and Tuffbar.
On April 18, 1996, the Company sold its stock in Hercules Automotive
Products, Inc. to MBC Corporation, a Minnesota corporation. Hercules, whose
products were primarily marketed through dealer oriented programs, had failed to
meet expectations since being acquired in January 1995. The results of
operations discussed below do not include the results of the discontinued
Hercules business segment for the periods presented.
Results of Operations
The light duty truck market continued to grow in the second quarter of
1996. Total Company sales for this period grew by 23% over the same period in
1995. Growth in the sales of Westin step bars and grille guards represented 91%
of the total sales increase for the quarter reflecting the market's continued
acceptance of the Westin line of tubular accessories.
Three Months Ended June 30, 1996 compared to Three Months Ended June 30, 1995
Revenues: Net sales from continuing operations increased 23% to
$11,840,000 for the second quarter of 1996 compared to $9,652,000 for the same
period in 1995. Sales of Westin tubular products accounted for 91% or $2,000,000
of this increase.
Gross Profits: Gross profits increased 19% to $4,219,000 or 36% of
sales for the period compared to $3,546,000 or 37% of sales for the same period
in 1995. The decline in margin percentage in 1996 over 1995 is due to short term
costs incurred in response to the 80% growth of Westin business within the
quarter.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased 20% to $2,863,000 for the period compared to
$2,382,000 in 1995. Distribution and selling costs incurred on additional sales
volumes accounted for 65% or $311,000 of this increase. Advertising and
promotion expenses accounted for $143,000 of the increase and expenditures for
legal and audit costs accounted for the remainder or $27,000.
Interest Expense: Interest expense increased 29% to $234,000 for the
period compared to $182,000 in 1995. This increase was due to financing the
growth in working capital required to meet the increase in second quarter 1996
sales.
Net Income from Continuing Operations: Net income from continuing
operations increased 9% to $916,000 for the second quarter 1996 compared to
$837,000 for the same period in 1995.
Six Months Ended June 30, 1996 to Six Months Ended June 30, 1995
Revenues: Net sales from continuing operations increased 14% to
$21,623,000 for the six months ended June 30, 1996 compared to $18,929,000 for
the same period in 1995. Sales of Westin tubular products accounted for 97% or
$2,600,000 of this increase.
Gross Profits: Gross profits increased 17% to $7,498,000 or 35% of
sales for the six month period compared to $6,398,000 or 34% of sales for the
same period in 1995.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased 14% to $5,308,000 for the six month period
compared to $4,661,000 for 1995. Distribution, selling and promotional costs
incurred to achieve rising sales volumes were 74% of this increase or $477,000.
Administrative costs totaling $170,000 made up the balance of this increase.
Included in administrative expense increases were
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<PAGE>
audit and legal fees totaling $69,000. Insurance and other management costs
comprise the balance of the increase in administrative costs.
Interest Expense: Interest expense increased 14% to $453,000 for the
six month period compared to $397,000 in 1995. This increase was due to
financing the working capital growth required to meet the increase in second
quarter 1996 sales.
Net Income from Continuing Operations: Net income from continuing
operations increased 32% to $1,442,000 for the six month period compared to
$1,092,000 in 1995. This increase was primarily due to increased volumes and a
more favorable product mix.
Liquidity and Capital Resources
To date, Wedgestone has financed its business activities through cash
flow from operations. Additional debt has been incurred primarily for working
capital and acquisitions.
For the six months ended June 30, 1996, cash flows from operations
totaling $1,904,000 were supplemented by additional advances from trade
creditors totaling $1,076,000. The Company invested $3,275,000 of this cash flow
in working capital including $2,225,000 in trade receivables and $922,000 in
inventories. This resulted in net cash used in operating activities of $295,000.
Cash used in operating activities, additional investments in equipment totaling
$346,000 and repayments of long term debt totaling $436,000 were offset by
$1,072,000 in additional borrowings under the Company's revolving line of credit
and proceeds from the sale of equipment and other property totaling $220,000,
resulting in a net increase in cash of $215,000 compared to a $37,000 reduction
for the same period in 1995.
Wedgestone has borrowings outstanding from a related party totaling
$594,000 (the "Rockaway Loan") as of June 30, 1996, which mature in September
1996. Under this credit agreement, the borrowings are collateralized by
substantially all of the assets of the Company.
In connection with the acquisition of the Automotive Segment of
Standun, Inc., Wedgestone, through certain wholly-owned subsidiaries, entered
into a $7.5 million revolving credit line with a financial institution which
expires in 1997. The credit line provides for borrowings (minimum borrowings of
$4 million are required) based on a percentage of inventory and accounts
receivable. Interest on the outstanding borrowings accrued at prime, plus 2.5%.
The agreement also includes equipment term loans approximating $1.0 million at
June 30, 1996. The agreement contains certain covenants which require the
maintenance of minimum working capital and equity.
To the extent that Wedgestone expands its operations and makes
additional acquisitions, it will need to obtain additional funding from
institutional lenders and other sources. Wedgestone's ability to use equity in
obtaining funding may be limited by its desire to preserve certain tax atributes
including its net operating loss carry forwards.
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<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
A report on Form 8-K was filed on April 18, 1996, relating to the sale
of Hercules Automotive Products, Inc. to MBC Corporation.
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<PAGE>
PART II
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Wedgestone Financial
Date: August 14, 1996 By: /s/ Jeffrey S. Goldstein
------------------------------
President and Treasurer
(Principal Executive and Financial
Officer)
The name "Wedgestone Financial" (Formerly Wedgestone Realty Investors Trust) is
the designation of the Trustees under a Declaration of Trust dated March 12,
1980, as amended, and in accordance with such Declaration of Trust notice is
hereby given that all persons dealing with Wedgestone Financial by so acting
acknowledge and agree that such persons must look solely to the Trust property
for the enforcement of any claims against Wedgestone Financial and that neither
Trustees, Officers, employees, agents nor shareholders assume any personal
liability for claims against the Trust or obligations entered into on behalf of
Wedgestone Financial, and that respective properties shall not be subject to
claims of any other person in respect of any such liability.
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000315621
<NAME> WEDGESTONE FINANCIAL
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 457
<SECURITIES> 0
<RECEIVABLES> 7,563
<ALLOWANCES> 192
<INVENTORY> 3,943
<CURRENT-ASSETS> 12,746
<PP&E> 10,928
<DEPRECIATION> 7,932
<TOTAL-ASSETS> 19,430
<CURRENT-LIABILITIES> 7,088
<BONDS> 0
<COMMON> 21,886
0
0
<OTHER-SE> (15,701)
<TOTAL-LIABILITY-AND-EQUITY> 19,430
<SALES> 21,623
<TOTAL-REVENUES> 21,623
<CGS> 14,125
<TOTAL-COSTS> 14,125
<OTHER-EXPENSES> 5,330
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> 453
<INCOME-PRETAX> 1,715
<INCOME-TAX> 273
<INCOME-CONTINUING> 1,442
<DISCONTINUED> (1,004)
<EXTRAORDINARY> 0
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</TABLE>
