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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
March 31, 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 May 14, 1996: 21,885,668
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<PAGE>
WEDGESTONE FINANCIAL & SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets - March 31, 1996 (unaudited) and
December 31, 1995..............................................2
Consolidated Statements of Operations (unaudited) for
the Three Months Ended March 31, 1996 and 1995.................3
Consolidated Statements of Shareholders' Equity (unaudited)
for the Three Months Ended March 31, 1996 and 1995.............4
Consolidated Statements of Cash Flows (unaudited) for
the Three Months Ended March 31, 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 March 31, 1996 and December 31, 1995
(Amounts in Thousands - except share data)
(Unaudited)
ASSETS 1996 1995
---- ----
Current Assets:
Cash $ 125 $ 242
Accounts and other receivables - (net of allowances
of $192 and $196 in 1996 and
1995, respectively) 6,077 5,146
Inventories 3,368 3,021
Prepaid expenses and other assets 452 372
Deferred income taxes 476 476
-------- --------
Total Current Assets 10,498 9,257
-------- --------
Notes receivable - net 84 84
Real estate acquired by foreclosure - net 1,086 1,091
Property, plant and equipment - net 3,251 3,248
Goodwill 162 173
Deferred income taxes 2,114 2,114
Net assets of discontinued operations -- 295
Other assets 323 343
-------- --------
7,020 7,348
-------- --------
Total Assets $ 17,518 $ 16,605
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,439 $ 1,406
Accounts payable 3,220 2,739
Accrued payroll and related expenses 585 501
Other accrued expenses 602 809
-------- --------
Total Current Liabilities 5,846 5,455
Long-term debt 5,694 5,403
Net liabilities of discontinued operations 83 --
-------- --------
Total Liabilities 11,623 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 (47,387) (47,535)
-------- --------
Total Shareholders' Equity 5,895 5,747
-------- --------
Total Liabilities and Shareholders' Equity $ 17,518 $ 16,605
======== ========
See notes to consolidated financial statements.
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<PAGE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1996 and 1995
(Unaudited)
(Amounts in Thousands - except per share data)
1996 1995
---- ----
Net sales $ 9,783 $ 9,277
Cost of sales 6,504 6,425
-------- --------
Gross profit 3,279 2,852
Selling, general and administrative expenses 2,445 2,279
-------- --------
Operating income 834 573
Goodwill amortization 11 11
Interest expense 219 215
-------- --------
Income before taxes 604 347
Provision for income taxes 78 92
-------- --------
Income from continuing operations 526 255
Net loss from discontinued operations
(net of income tax benefit of$231 and
$80 in 1996 and 1995, respectively) (378) (120)
-------- --------
Net income $ 148 $ 135
======== ========
Net income (loss) per share of Beneficial Interest:
Income from continuing operations $ .02 $ .01
Loss from discontinued operations (.01) .00
-------- --------
Net income $ .01 $ .01
======== ========
Weighted average number of shares outstanding:
Shares of Beneficial Interest 21,886 21,786
======== ========
See notes to consolidated financial statements.
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<PAGE>
<TABLE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 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
Net Income 135 135
------ -------- -------- -------- --------
Balance at March 31, 1995 21,786 $ 21,786 $ 31,396 ($49,245) $ 3,937
====== ======== ======== ======== ========
Balance at December 31, 1995 21,886 $ 21,886 $ 31,396 ($47,535) $ 5,747
Net income 148 148
------ -------- -------- -------- --------
Balance at March 31, 1996 21,886 $ 21,886 $ 31,396 ($47,387) $ 5,895
====== ======== ======== ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1996 and 1995
(Unaudited)
(Amounts in Thousands)
1996 1995
---- ----
Cash Flows from Operating Activities:
Net income $ 148 $ 135
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 211 190
Losses on discontinued operations 378 120
Changes in operating assets and liabilities:
Accounts and other receivables (931) (397)
Inventories (347) 323
Prepaid expenses and other current assets (80) (20)
Accrued payroll and related expenses 83 (127)
Other accrued expenses (207) 28
Accounts payable 481 246
Other assets -- (9)
----- -----
Net cash provided by (used in) operating activities (264) 489
----- -----
Cash Flows from Investing Activities:
Proceeds from repayment of mortgage notes receivable -- 1
Capital expenditures (183) (722)
Investment in real estate 5 (28)
----- -----
Net cash used in investing activities (178) (749)
----- -----
Cash Flows from Financing Activities:
Borrowings (Repayment) of term debt (123) 52
Deferred financing fees paid -- (74)
Net borrowings on revolving debt 448 213
----- -----
Net cash provided by financing activities 325 191
----- -----
Net decrease in cash (117) (69)
Cash at beginning of period 242 179
----- -----
Cash at end of period $ 125 $ 110
===== =====
See notes to consolidated financial statements.
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<PAGE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 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 rails; and various other related aftermarket products. The Company's
automotive products are marketed in traditional, original equipment 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 $1,091,000 as of March 31, 1995. Wedgestone has
outstanding loans on one property, net of reserves, of approximately $84,000 as
of March 31, 1995.
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 give retroactive effect to the discontinued operations of
Hercules (see Note 3).
The consolidated financial statements include the accounts of
Wedgestone and its wholly owned subsidiaries. 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)
March 31, December 31,
1996 1995
---- ----
Finished goods $ 1,566 $ 1,480
Work in progress 1,048 893
Raw materials 871 785
------- -------
3,485 3,158
Less allowances (117) (137)
------- -------
$ 3,368 $ 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 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 March 31, 1996 and December 31, 1995 Consolidated Balance
Sheets as follows: (In Thousands)
March 31, December 31,
1996 1995
---- ----
Net Assets (Liabilities)
Current Assets $ 1,537 $ 2,480
Current Liabilities (1,282) (1,749)
Net Property Plant and Equipment 1,423 1,447
Other Assets 1,479 1,506
Noncurrent Liabilities (3,240) (3,045)
------- -------
(283) 639
Intercompany Receivable (Payable)
with Wedgestone Automotive Corp -- (344)
------- -------
$ (83) $ 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 were
$1,447,000 and $2,766,000 for the three months ended March 31, 1996 and 1995,
respectively.
Between March 31, 1996 and April 18, 1996, the Company incurred
additional operating losses on discontinued operations totaling approximately
$289,000. In April, in connection with the sale of the stock of Hercules, the
Company will record a gain of approximately $372,000.
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<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. It
markets its products under various tradenames including Fey, Westin and Tuffbar.
As of March 31, 1996, the Company has two plants located in California and one
in Minnesota.
Results of Operations
The light duty truck market continues to demonstrate strength and grow
as a percentage of total domestic new vehicle sales. Sales performance for the
first quarter of 1996 was strong for both Fey and Westin products. Sales of
Hercules products continued to decline in the first quarter. Hercules, whose
products are primarily marketed through dealer oriented programs, have failed to
meet expectations since being acquired on January 9, 1995. The Company,
believing that these trends were likely to continue, closed the Hercules Pelham
facility on March 5, 1996. Subsequent to March 31, 1996, it was determined that
this business segment be discontinued in its entirety. On April 18, 1996, the
Board approved the sale of the Company's stock in Hercules to MBC Corporation, a
Minnesota corporation. The results of operations discussed below do not include
the results of the discontinued business segment Hercules for both the quarters
ended March 31, 1996 and 1995.
Three Months Ended March 31, 1995 compared to Three Months Ended March 31, 1996
Revenues: Net sales from continuing operations increased 5% to
$9,783,000 for the first quarter of 1996 compared to $9,277,000 for the same
period in 1995. Sales of Westin products accounted for the majority of this
increase.
Gross Profits: Gross profits increased to $3,279,000, or 34% of net
sales for the first quarter of 1996 compared to $2,852,000, or 31% of net sales
for the same period last year. This increase is primarily due to sales in 1996
of a more profitable mix of products.
Selling, General and Administrative Expenses: Distribution, sales and
marketing expenses were essentially unchanged totaling $1,427,000 and $1,424,000
for the quarters ended March 31, 1996 and 1995, respectively. Administrative
expenses for the quarter ended March 31, 1996 totaled $1,018,000 compared to
$855,000 for the same period in 1995. This increase is due to additional costs
incurred in developing corporate management, legal fees, and corporate insurance
costs.
Interest Expense: Interest expense increased by $4,000 to $219,000 for
the three months ended March 31, 1996 compared to $215,000 for the same period
in 1995.
Net Income from Continuing Operations: Net income from continuing
operations grew by 106% to $526,000 compared to $255,000 for the three months
ended March 31, 1996 and 1995, respectively, primarily due to increased volumes
and 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 three months ended March 31, 1996, cash flows from operations
totaling $359,000 were supplemented by repayments of intercompany amounts owed
by Hercules totaling $378,000 as well as $229,000 in additional advances from
trade creditors. The Company invested $1,230,000 of this cash flow in working
capital, including $931,000 in trade receivables and $347,000 in inventories.
This resulted in net cash used in operating activities of $264,000. Cash used in
operating activities, additional investments in equipment totaling $178,000 and
repayments of long term debt totaling $123,000 were partially funded by $448,000
in additional borrowings under the Company's revolving line of credit, resulting
in a net decrease in cash of $117,000 for the three months ended March 31, 1996
compared to a $69,000 reduction for the same period in 1995.
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<PAGE>
Wedgestone has borrowings outstanding from a related party totaling
$677,000 (the "Rockaway Loan") as of March 31, 1996, which mature in July 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 Sergment 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 accures at prime, plus 2.5%.
The agreement also includes equipment term loans approximating $1.3 million at
March 31, 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.
-9-
<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 March 5, 1996, relating to the closure
of the Company's manufacturing plant in Pelham, Georgia.
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: 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.
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> MAR-31-1996
<CASH> 125
<SECURITIES> 0
<RECEIVABLES> 6,269
<ALLOWANCES> 192
<INVENTORY> 3,368
<CURRENT-ASSETS> 10,498
<PP&E> 11,055
<DEPRECIATION> 7,804
<TOTAL-ASSETS> 17,518
<CURRENT-LIABILITIES> 5,846
<BONDS> 0
<COMMON> 21,886
0
0
<OTHER-SE> (15,991)
<TOTAL-LIABILITY-AND-EQUITY> 17,518
<SALES> 9,783
<TOTAL-REVENUES> 9,783
<CGS> 6,504
<TOTAL-COSTS> 6,504
<OTHER-EXPENSES> 2,456
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 219
<INCOME-PRETAX> 604
<INCOME-TAX> 78
<INCOME-CONTINUING> 526
<DISCONTINUED> (378)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
