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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, 1997
[ ] 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)
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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
Asof May 13, 1997, 21,885,668 shares of beneficial interest were outstanding.
The aggregate market value of the shares held by non-affiliates of the
registrant on that date was approximately $ 2,089,000 based on
the last reported sale price of the shares at that date.
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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, 1997
(unaudited) and December 31, 1996............................2
Consolidated Statements of Operations
(unaudited) for the Three Months Ended
March 31, 1997 and 1996..................................... 3
Consolidated Statements of Shareholders'
Equity (unaudited) for the Three Months
Ended March 31, 1997 and 1996............................... 4
Consolidated Statements of Cash Flows
(unaudited) for the Three Months Ended
March 31, 1997 and 1996..................................... 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.......................................... 11
Item 2 Changes in Securities...................................... 11
Item 3 Defaults upon Senior Securities............................ 11
Item 4 Submission of Matters to a Vote of
Security Holders........................................... 11
Item 5 Other Information.......................................... 11
Item 6 Exhibits and Reports on Form 8-K........................... 11
Signatures................................................................... 12
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<PAGE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 1997 and December 31, 1996
(Amounts in Thousands - except share data)
(Unaudited)
ASSETS 1997 1996
-------- --------
Current Assets:
Cash $ 1,580 $ 344
Accounts and other receivables -
(net of allowances of $342 and $333
in 1997 and 1996, respectively) 6,384 7,282
Inventories 5,014 4,619
Prepaid expenses and other current assets 522 565
Deferred income taxes 348 476
-------- --------
Total Current Assets 13,848 13,286
-------- --------
Notes receivable - net 81 81
Real estate acquired by foreclosure - net 176 1,086
Property, plant and equipment - net 3,293 3,237
Goodwill 119 130
Deferred income taxes 2,196 2,196
Other assets 287 334
-------- --------
6,152 7,064
-------- --------
Total Assets $ 20,000 $ 20,350
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line and current
portion of long-term debt $ 526 $ 1,952
Accounts payable 3,959 3,882
Accrued payroll and related expenses 542 593
Other accrued expenses 1,386 1,535
-------- --------
Total Current Liabilities 6,413 7,962
Long-term debt 6,206 5,269
-------- --------
Total Liabilities 12,619 13,231
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 (45,901) (46,163)
-------- --------
Total Shareholders' Equity 7,381 7,119
-------- --------
Total Liabilities and Shareholders' Equity $ 20,000 $ 20,350
======== ========
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, 1997 and 1996
(Unaudited)
(Amounts in Thousands - except per share data)
1997 1996
-------- --------
Net sales $ 11,556 11,230
Cost of sales 7,807 8,109
-------- --------
Gross profit 3,749 3,121
Selling, general and administrative expenses 3,464 2,749
-------- --------
Operating income 285 372
Goodwill amortization 11 16
Other expense (income) (418) --
Interest expense 285 361
-------- --------
Income (loss) before taxes 407 (5)
Provision (benefit) for income taxes 145 (153)
-------- --------
Net income $ 262 $ 148
======== ========
Net income per share of beneficial interest $ .01 $ .01
======== ========
Weighted average number of shares outstanding 21,886 21,886
======== ========
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, 1997 and 1996
(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, 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
======== ======== ======== ======== ========
Balance at December 31, 1996 21,886 $ 21,886 $ 31,396 ($46,163) $ 7,119
Net income 262 262
-------- -------- -------- -------- --------
Balance at March 31, 1997 21,886 $ 21,886 $ 31,396 ($45,901) $ 7,381
======== ======== ======== ======== ========
<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, 1997 and 1996
(Unaudited)
(Amounts in Thousands)
1997 1996
------- -------
Cash Flows from Operating Activities:
Net income $ 262 $ 148
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 208 222
Gain on sale of real estate (418) --
Loss on disposal of assets -- 3
Deferred income taxes 129 --
Changes in operating assets and liabilities:
Accounts and other receivables 898 (393)
Inventories (395) (261)
Prepaid expenses and other current assets 43 (75)
Accounts payable 77 137
Accrued payroll and related expenses (150) (6)
Other accrued expenses (51) (224)
Other assets 26 --
------- -------
Net cash provided by (used in) operating activities 630 (449)
------- -------
Cash Flows from Investing Activities:
Proceeds from sale of equipment -- 17
Proceeds from sale of real estate 1,328 --
Capital expenditures (233) (183)
Investment in real estate -- 5
------- -------
Net cash provided by (used in) investing activities 1,095 (161)
------- -------
Cash Flows from Financing Activities:
Borrowings (repayments) of term debt 731 (123)
Net borrowings (repayments) on revolving debt (1,220) 804
------- -------
Net cash provided by (used in) financing activities (489) 681
------- -------
Net increase in cash 1,236 71
Cash at beginning of period 344 365
------- -------
Cash at end of period $ 1,580 $ 436
======= =======
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.
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
dealer 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 two properties
that were acquired by foreclosure. The aggregate value, net of reserves, is
approximately $176,000 as of March 31, 1997. Wedgestone has outstanding loans on
one property, net of reserves, of approximately $81,000 as of March 31, 1997.
Acquisitions - Since May 1992, Wedgestone has acquired three
manufacturing operations. On June 15, 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 a related party of Wedgestone, 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. As a result of the acquisition,
Standun owned 31% of the outstanding shares of beneficial interest of
Wedgestone. 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 was 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
- - Sale of Subsidiary.)
Basis of Presentation and Principles of Consolidation 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, 1996.
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
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<PAGE>
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,
1997 1996
---- ----
Finished goods $ 2,567 $ 2,474
Work in progress 1,453 1,239
Raw materials 1,134 1,025
------- -------
5,154 4,738
Less allowances (140) (119)
------- -------
$ 5,014 $ 4,619
======= =======
NOTE 3. Sale of Subsidiary
On March 5, 1996, Hercules closed its manufacturing plant in Pelham,
Georgia. The market for the bumpers produced in the Pelham facility
significantly changed during 1995. Historically, a significant percentage of
Hercules business was for sales to dealers of domestic original equipment
manufacturers. A new program implemented by one of these manufacturers in late
1994 made it extremely difficult for Hercules to remain competitive in this
market segment. Hercules incurred a net loss of $125,000 in 1995 and continued
to incur losses in 1996 through the date of sale totaling $966,000. As a result,
management determined that closing the Pelham facility was appropriate.
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 $1.00
and the assumption of certain debt and other liabilities approximating $4.5
million, pursuant to a Stock Purchase Agreement.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Background
On June 15, 1992, Wedgestone acquired St. James Automotive Corp. This
subsidiary manufactures and sells tubular products for the light-duty truck
market such as grille guards, push bars and step bars. On November 18, 1994,
Wedgestone acquired the Automotive segment of Standun, Inc. ("Standun) which
consisted of Sigma and the Fey Automotive Products division. The assets of the
Fey division, which included the stock of Sigma, were merged into Wedgestone's
wholly owned subsidiary Fey Automotive Products, Inc. In conjunction with the
acquisition of the Automotive Segment of Standun, Wedgestone placed St. James,
Fey and Sigma under the common ownership of its wholly owned subsidiary,
Wedgestone Automotive. Collectively, these companies comprise the Automotive
Products business segment which, unless the context requires otherwise, will be
hereinafter referred to as Wedgestone Automotive.
On January 5, 1995, Wedgestone Automotive, through its wholly owned
subsidiary Hercules Automotive Products, Inc. acquired substantially all of the
assets of Hercules Bumpers, Inc., a Georgia company. This acquisition was
intended to provide access to a new business segment for Wedgestone Automotive.
The segment, known as dealer direct, involves the sale of rear step bumpers for
light-duty trucks to new vehicle dealers as an alternative to the factory
supplied bumper. Hercules Bumpers, Inc., was the largest domestic supplier in
this dealer direct segment offering dealers a line of specialty bumpers. During
1995, a major OE manufacturer initiated a program to secure a greater portion of
rear step bumper sales. The program, which involved severe price competition and
program buying, eroded a substantial portion of Hercules' sales base and placed
Hercules in a loss position for the fourth quarter of 1995. In response to the
likely prospect of continued losses, Wedgestone Automotive ceased manufacturing
operations at Hercules on March 5, 1996. In a further decision to exit this
segment, Wedgestone Automotive sold its ownership in Hercules to MBC Corporation
for $1.00 and the assumption of certain debt and other liabilities approximating
$4.5 million pursuant to a Stock Purchase Agreement. The Pelham manufacturing
plant along with its inventory and accounts receivable constituted all of the
material assets of Hercules.
Liquidity and Capital Resources
To date, Wedgestone has financed its business activities through cash
flows from operations. Additional debt has been incurred primarily for working
capital and acquisitions.
For the period ended March 31, 1997, cash flows from operations
totaling $181,000 were supplemented by a reduction in trade receivables and
other current assets totaling $898,000 and $43,000, respectively, and other
assets totaling $26,000. These funds were used to acquire $395,000 in additional
inventories and repay $123,000 in unsecured creditor advances, resulting in net
cash provided by operations totaling $630,000 for the first quarter of 1997
compared to cash consumed by operations totaling $449,000 for this same period
in 1996. Net cash flows from operations were further supplemented during the
quarter by net proceeds from the sale of real estate totaling $1,328,000 and
additional borrowings on long-term debt totaling $731,000. During 1997, the
Company invested $233,000 in new equipment and made payments on revolving debt
totaling $1,220,000 resulting in a net increase in cash for the three months
ended March 31, 1997 totaling $1,236,000 compared to $71,000 for the same period
in 1996.
In November 1994 Wedgestone entered into a three-year, $7.5 million
credit facility, which provided for a revolving credit line and term loan with
CIT / Credit Finance ("CIT"), and was collateralized by substantially all of the
assets of the Company. On March 18, 1997, the Company amended and restated the
agreement with CIT resulting in a five-year $10 million credit facility
providing a revolving credit line and term loan under terms substantially
similar to the original agreement. The amended and restated agreement provides
for borrowings based on a percentage of inventory and receivables and includes
an equipment term loan, at the lender's prime rate plus 1.375% (11% at March 31,
1997).
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<PAGE>
In connection with the acquisition of Hercules on January 9, 1995, a
wholly-owned subsidiary of Wedgestone assumed certain debt consisting of a term
loan of $4.0 million, and an industrial revenue bond of $285,000 due March 1,
1999. On March 5, 1996, the Company closed the Hercules facility in Pelham,
Georgia, as a result of unfavorable market conditions. On April 18, 1996, the
Company sold its stock ownership in Hercules to MBC Corporation for $1.00 and
the assumption of certain debt and other liabilities, including the outstanding
borrowings on the term loan and industrial revenue bond. The total debt and
liabilities assumed by MBC Corporation approximated $4.5 million.
The Company continues to actively seek acquisition opportunities in the
Automotive Products Business Segment. While there are no specific opportunities
identified at this time, 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
attributes including its net operating loss carry forwards.
Results Of Operations
Current Year Performance: 1997 Compared to 1996
Net sales increased $326,000 to $11,556,000 for the three months ended
March 31, 1997 compared to $11,230,000 for the same period in 1996. This
reflects a $1,447,000 decrease in the sales of Hercules products as a result of
the closure of the Hercules' plant in 1996, offset by a $1,773,000 or 18%
increase in the sales of products manufactured in the Company's St. James and
Fey subsidiaries. Contributing to the overall growth in net sales is a combined
$2,042,000 or 23% increase in the Company's traditional and retail market
segments offset by a $269,000 or 31% decline in the Company's original equipment
segment. The Company continues to pursue the OE segment of the light-duty truck
aftermarket and considers this segment to be an important component of future
growth.
Gross margins increased $628,000 or 20% to $3,749,000 or 32% of sales
in 1997 compared to $3,121,000 or 28% of sales in 1996 which included $158,000
in gross margin losses on the sales of Hercules' products.
Sales and marketing costs increased by $317,000 or 20% to $1,912,000 or
17% of sales in 1997 compared to $1,595,000 or 14% of sales in 1996. The
majority of this increase is selling costs incurred to enhance and maintain the
higher sales volumes achieved in 1997. $200,000 or 63% of the increase is due to
additional advertising and promotional costs incurred by the Company to further
penetrate the traditional and retail market segments. The Company believes that
further expenditures in this area are required to maintain the market growth
achieved and expand these markets further.
Administrative costs increased by $398,000 or 34% to $1,552,000 in 1997
compared to $1,154,000 in 1996. This reflects a decrease of $136,000 in
administrative costs attributable to Hercules operations and an increase of
$514,000 in all other administrative costs. Product design and development costs
account for $253,000 of this increase. Included in these costs are salaries,
benefits and overhead costs for additions to the Company's engineering staff.
The Company believes that its future competitive position in the automotive
aftermarket will require significant increases in engineering and development
costs over the next several years. Legal, accounting, insurance and other
administrative costs make up the balance of this increase.
Other income for the three months ended March 31, 1997 consists of the
gain on the sale of the Company's 21 acres of land known as the College Point
property.
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<PAGE>
Interest expense decreased $76,000 or 21% to $285,000 in 1997 compared
to $361,000 in 1996. This decrease is attributable to the decrease in debt
associated with Hercules.
Income taxes in 1996 reflect a $151,000 adjustment to the Company's
valuation reserve. The adjustment was due to management's expectations of the
Company's enhanced ability to utilize its net operating loss carry forwards due
to its more recent earnings performance. There was no similar adjustment made
for the three months ended March 31, 1997.
Forward Looking Information
Information contained in this Form 10-Q contains "forward-looking
statements" within the meaning of the private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology such
as "may", "will", "expect", "plan", "anticipate", "estimate or "continue" or the
negative thereof or other variations thereon or comparable terminology. There
are certain important factors that could cause results to differ materially from
those anticipated by some of these forward-looking statements. Investors are
cautioned that all forward-looking statements involve risks and uncertainty. The
factors, among others, that could cause actual results to differ materially
include: pricing and merchandising policies from the major automotive
manufacturers; the Company's ability to execute its business plan; the
acceptance of the Company's merchandising strategies by its target customers;
competitive pressures on sales and pricing; and increases in other costs which
cannot be recovered through improved pricing of merchandise.
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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
None.
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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: May 14, 1996 By: /s/ Jeffrey S. Goldstein
--------------------------
President and Chief Accounting Officer
(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-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,580
<SECURITIES> 0
<RECEIVABLES> 6,726
<ALLOWANCES> 342
<INVENTORY> 5,014
<CURRENT-ASSETS> 13,848
<PP&E> 11,702
<DEPRECIATION> 8,409
<TOTAL-ASSETS> 20,000
<CURRENT-LIABILITIES> 6,413
<BONDS> 0
0
0
<COMMON> 21,886
<OTHER-SE> (14,505)
<TOTAL-LIABILITY-AND-EQUITY> 20,000
<SALES> 11,556
<TOTAL-REVENUES> 11,556
<CGS> 7,807
<TOTAL-COSTS> 7,807
<OTHER-EXPENSES> 3,057
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 285
<INCOME-PRETAX> 407
<INCOME-TAX> 145
<INCOME-CONTINUING> 262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 262
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
