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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
September 30, 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)
---------------------------
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
As of November 14, 1997, 21,885,668 shares of beneficial
interest were outstanding.
Total number of pages in this document: 14
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<PAGE>
WEDGESTONE FINANCIAL & SUBSIDIARIES
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Financial Statements
Consolidated Balance Sheets - September 30, 1997 (unaudited) and
December 31, 1996.........................................................................2
Consolidated Statements of Operations (unaudited) for
the Three Months and Nine Months Ended September 30, 1997 and 1996........................3
Consolidated Statements of Shareholders' Equity (unaudited) for
the Nine Months Ended September 30, 1997 and 1996.........................................4
Consolidated Statements of Cash Flows (unaudited) for
the Three Months and Nine Months Ended September 30, 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........................................................................12
Item 2 Changes in Securities....................................................................12
Item 3 Defaults upon Senior Securities..........................................................12
Item 4 Submission of Matters to a Vote of Security Holders......................................12
Item 5 Other Information........................................................................12
Item 6 Exhibits and Reports on Form 8-K.........................................................12
Signatures.................................................................................................13
</TABLE>
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<TABLE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 1997 and December 31, 1996
(Amounts in Thousands - except share data)
<CAPTION>
(Unaudited)
1997 1996
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 91 $ 344
Accounts and other receivables - (net of allowances of $263 and $222
in 1997 and 1996, respectively) 7,319 7,282
Inventories 6,084 4,619
Prepaid expenses and other current assets 347 565
Deferred income taxes 500 476
-------- --------
Total Current Assets 14,341 13,286
-------- --------
Notes receivable - net 1,801 81
Real estate acquired by foreclosure - net 196 1,086
Property, plant and equipment - net 3,582 3,237
Goodwill 97 130
Deferred income taxes 1,357 2,196
Other assets 228 334
-------- --------
7,261 7,064
-------- --------
Total Assets $ 21,602 $ 20,350
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line and current portion of long-term debt $ 537 $ 1,952
Accounts payable 4,559 3,882
Accrued payroll and related expenses 617 593
Other accrued expenses 1,431 1,535
-------- --------
Total Current Liabilities 7,144 7,962
Long-term debt 5,318 5,269
-------- --------
Total Liabilities 12,462 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 (44,142) (46,163)
-------- --------
Total Shareholders' Equity 9,140 7,119
-------- --------
Total Liabilities and Shareholders' Equity $ 21,602 $ 20,350
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 1997 and 1996
(Unaudited)
(Amounts in Thousands - except per share data)
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 12,826 $ 11,441 $ 37,751 $ 34,389
Cost of sales 8,163 7,401 24,380 23,460
-------- -------- -------- --------
Gross profit 4,663 4,040 13,371 10,929
Selling, general and administrative expenses 3,429 3,254 10,059 8,867
-------- -------- -------- --------
Operating income 1,234 786 3,312 2,062
Goodwill amortization 11 11 33 38
Other income -- -- (418) --
Interest expense 176 267 648 876
-------- -------- -------- --------
Income before taxes 1,047 508 3,049 1,148
Provision for income taxes 287 98 1,028 300
-------- -------- -------- --------
Net income $ 760 $ 410 $ 2,021 $ 848
======== ======== ======== ========
Net income per share of beneficial interest $ .03 $ .02 $ .09 $ .04
======== ======== ======== ========
Weighted average number of shares outstanding 21,886 21,886 21,886 21,886
======== ======== ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 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 848 848
-------- -------- -------- -------- --------
Balance at September 30, 1996 21,886 $ 21,886 $ 31,396 ($46,687) $ 6,595
======== ======== ======== ======== ========
Balance at December 31, 1996 21,886 $ 21,886 $ 31,396 ($46,163) $ 7,119
Net income 2,021 2,021
-------- -------- -------- -------- --------
Balance at September 30, 1997 21,886 $ 21,886 $ 31,396 ($44,142) $ 9,140
======== ======== ======== ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months and Nine Months Ended September 30, 1997 and 1996
(Unaudited)
(Amounts in Thousands)
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 760 $ 410 $ 2,021 $ 848
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 217 198 651 671
Gain on sale of real estate -- -- (418) --
Gain on disposal of assets -- (2) -- (204)
Deferred income taxes 216 -- 815 52
Changes in operating assets and liabilities:
Accounts and other receivables (460) 85 (37) (1,273)
Inventories (512) (1,025) (1,465) (1,359)
Prepaid expenses and other current assets 255 85 218 (43)
Accounts payable 854 102 677 823
Accrued payroll and related expenses 187 93 24 76
Other accrued expenses 24 83 (104) (352)
Other assets (8) (35) 16 (36)
------- ------- ------- -------
Net cash provided by (used in) operating activities 1,533 (6) 2,398 (797)
------- ------- ------- -------
Cash Flows from Investing Activities:
Proceeds from sale of equipment -- 2 -- 234
Proceeds from sale of real estate -- -- 1,328 --
Capital expenditures (547) (249) (963) (595)
Investment in notes receivable -- -- (1,650) --
Investment in real estate -- -- -- 5
------- ------- ------- -------
Net cash used in investing activities (547) (247) (1,285) (356)
------- ------- ------- -------
Cash Flows from Financing Activities:
Borrowings on term debt -- -- 841 --
Repayments of term debt (121) (697) (300) (1,134)
Net borrowings (repayments) on revolving debt (930) 616 (1,907) 2,044
------- ------- ------- -------
Net cash provided by (used in) financing activities (1,051) (81) (1,366) 910
------- ------- ------- -------
Net decrease in cash (65) (334) (253) (243)
Cash at beginning of period 156 456 344 365
------- ------- ------- -------
Cash at end of period $ 91 $ 122 $ 91 $ 122
======= ======= ======= =======
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
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WEDGESTONE FINANCIAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months and Nine Months Ended September 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.
Wedgestone's primary business is now the manufacture and distribution
of 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.
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 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
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Inventories consist of the following: (In Thousands)
September 30, December 31,
1997 1996
---- ----
Finished goods $ 3,352 $ 2,474
Work in progress 1,368 1,239
Raw materials 1,512 1,025
------- -------
6,232 4,738
Less allowances (148) (119)
------- -------
$ 6,084 $ 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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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 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
1994, 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.
Since 1994 the Company has operated solely within the automotive
aftermarket, serving both OE manufacturers and aftermarket customers with
bumpers and tubular steel accessories. Since 1996, an erosion of Wedgestone's
bumper sales has occurred due to a desire on the part of truck manufacturers to
integrate the design of rear step bumpers into their current designs for light
duty pick-up trucks and sport utility vehicles. New vehicle dealers who might
choose Wedgestone's bumpers instead of the factory equivalent due to advantages
in either price or greater tow capacity are returning to the factory bumper due
to the incompatibility of the Company's current bumper line with current vehicle
designs. For the near term, sales of Wedgestone bumpers to the crash replacement
market will continue, however, unless the Company invests in new designs, its
current line will not support the long term demands of the crash replacement
market for aftermarket bumpers.
In the past, the expected return on investment for updating the
Company's bumper line was based on both crash replacement and aftermarket sales
for new vehicles. Sales in both of these markets is used to justify the cost of
new tooling. Since 1995, however, there has been a significant effort on the
part of the OE manufacturers to improve dealer loyalty for their products. These
efforts, which have been promoted through the use of pricing strategies designed
to enhance dealer profits, have significantly eroded the Company's sales of
bumpers to new vehicle dealers. As a result of the success of OE campaigns to
enhance dealer loyalty, the Company does not believe there would be a sufficient
return on investment to support the estimated $2 million required to develop new
tooling to replicate current OE bumper designs. The Company is looking at
alternative methods to lower the cost of this investment, including avoiding the
investment through the import of components that more closely conform to the
appearance of the new OE bumpers.
In recent years, particulary with the development of their new truck
designs, the OE manufacturers have increased their own line of aftermarket truck
accessories. These accessories are being offered to their dealer networks in an
effort to enhance OE profitability by participating in the more profitable
aspects of the accessory aftermarket for their light duty trucks and sport
utility vehicles. The sale of OE accessories has significantly benefitted from
the OE programs designed to promote dealer loyalty. Wedgestone's line of tubular
accessories has also benefitted from the OE accessory programs in that the
Company has been able to secure supplier agreements from several OE
manufacturers for Step Bars, Grille Guards, Light Bars, Push Bars and Combo
Bars. These accessories are all tubular in nature and represent one consistent
style of product. The Company's ability to rely on the sales of these products
in the future is entirely dependant on the consumer's continued acceptance of
these types of accessories.
Due to the vulnerability of continued earnings stemming from a decline
in bumper sales and the Company's dependancy on tubular products for its OE
programs, Wedgestone intends to seek additional products and markets. While
remaining committed to its core competency of metal fabrication and finishing,
and maintaining its commitment to the light duty pickup and sport utility
aftermarket, Wedgestone intends to reduce its dependancy on this market as the
sole source of return on invested capital. This expansion of product and
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markets will require significant investments in tooling, processes and product
design. The Company expects this expansion to take several years and will
involve a significant financial commitment to procure equipment and finance the
acquisition of companies that would assist and accelerate Wedgestone's
penetration of market segments compatible with its core competency.
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 nine months ended September 30, 1997, cash flows from
operations totaling $3,069,000 were supplemented by additional advances from
unsecured creditors totaling $597,000 and a reduction in prepaid expenses and
other assets totaling $218,000 and $16,000, respectively. These funds were used
to acquire $1,465,000 in additional inventories and $37,000 in trade
receivables, resulting in net cash provided by operations totaling $2,398,000
for the first nine months of 1997 compared to cash consumed by operations
totaling $797,000 for this same period in 1996. Net cash flows from operations
were further supplemented during the period by net proceeds from the sale of
real estate totaling $1,328,000 and net borrowings on long-term debt totaling
$541,000. During 1997, the Company invested $963,000 in new equipment, invested
in notes receivable from a related party totaling $1,650,000 and made payments
on revolving debt totaling $1,907,000 resulting in a net decrease in cash for
the nine months ended September 30, 1997 totaling $253,000 compared to a
$243,000 decrease in cash 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% (10% at September
30, 1997).
On May 20, 1997 Wedgestone advanced Stockwood, LLC. ("Stockwood")
$1,650,000 under a one year secured note with interest at 12 percent. The note
is secured by 3,500,000 shares of beneficial interest of Wedgestone Financial
with principal and interest due at maturity. Stockwood is a related party
through common ownership by certain Wedgestone Financial shareholders.
Capital projects to increase production capacity have been authorized
totaling approximately $1,000,000 in response to new production awards. These
expenditures will culminate by the end of the first quarter of 1998. The Company
has secured satisfactory financing arrangements for these capital expenditures
in the form of third party operating leases. Management is continuing to review
the capital needs of the Company in light of its long and short term business
strategy.
The Company continues to actively seek acquisition opportunities in the
Automotive Products Business Segment and other market segments unrelated to the
automotive industry. Management believes such acquisitions to be critical to the
Company's long-term prospects. 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 pursuing acquisitions may be limited by its desire to preserve
certain tax attributes including its net operating loss carry forwards.
Results Of Operations
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
Net sales increased $1,385,000 or 12% to $12,826,000 for the three
months ended September 30, 1997 compared to $11,441,000 for the same period in
1996. This reflects a decrease of $1,039,000 or 18% in sales of bumpers offset
by a $2,424,000 or 43% increase in the sales of tubular and other products. The
increase in tubular sales reflects a continuing acceptance of the Company's line
of Westin tubular truck accessories in the light duty pickup and sport utility
aftermarket. The decline in bumper sales reflects a general decline in the
demand for aftermarket bumpers. This decline is mostly due to efforts of the
original equipment ("OE") manufacturers to
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integrate the rear step bumpers on light duty pickup trucks into the overall
design of each new vehicle. With the release of new OE bumper designs on 1997
models the Company is losing its competitive advantage afforded by its current
line of aftermarket bumpers. Management believes that the Company will continue
to experience significant erosion in bumper sales in the remaining three months
of 1997 and that the decline in bumper sales will accelerate in 1998 as new OE
light duty truck models are released. Slowing this decline will be a continued
demand for Wedgestone bumpers in the crash replacement market. The crash
replacement business, however, will also decline unless the Company makes
significant investments in new tooling to replicate the new OE bumper designs.
The Company is currently examining alternatives to these tooling investments,
including the import of components that more closely conform to the appearance
of the OE bumpers. Sales of bumpers for the year ended December 31, 1996
represented 48% or $21,688,000 of total Company sales.
The Company continues to pursue sales of its products directly to the
OE manufacturers. For the quarter ended September 30, 1997 sales to OE customers
increased 126% to $1,239,000 compared to $546,000 for the same period in 1996.
In response to OE quality requirements the Company received its ISO 9001 / QS
9000 rating on June 9, 1997. During the quarter ended June 30, 1997, the Company
received new production awards from Mercedes Benz, Subaru, and Nissan for
products to be made in its Irwindale, California facility. Initial sales on
these agreements totaled $988,000 for the quarter ended September 30, 1997. The
Company also received a production award from Ford in the quarter ended June 30,
1997 for product to be delivered in 1998. An investment approximating $1,000,000
in equipment will be required to fulfill this award. Purchase commitments for a
majority of this equipment have been made. All of the OE production awards are
for tubular products. These products are generally not a functional part of the
vehicle. Future procurement of such products by the OE manufacturers is
conditional upon market acceptance of the products as designed and upon the
public's continued interest in the general appearance of these types of
accessories.
Gross margins increased $633,000 or 15% to $4,663,000 or 36% of sales
for the three months ended September 30, 1997 compared to $4,040,000 or 35% of
sales in 1996.
Sales and marketing costs decreased by $177,000 or 9% to $1,860,000 or
15% of sales for the three months ended September 30, 1997 compared to
$2,037,000 or 19% of sales in 1996. The decrease is due to lower advertising and
promotional costs incurred by the Company in response to lower sales of
aftermarket bumpers.
Administrative costs increased by $352,000 or 28% to $1,569,000 for the
three months ended September 30, 1997 compared to $1,217,000 in 1996. Product
design and development costs account for 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.
Interest expense decreased $91,000 or 34% to $176,000 for the three
months ended September 30, 1997 compared to $267,000 in 1996. This decrease is
attributable to the decrease in interest rates in 1997 compared to 1996.
Interest rates were further reduced in the quarter as a result of the amended
and restated CIT credit facility.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Net sales increased $3,362,000 or 9% to $37,751,000 for the nine months
ended September 30, 1997 compared to $34,389,000 for the same period in 1996.
This reflects a decrease of $1,816,000 or 11% in sales of bumpers offset by a
$5,178,000 or 29% increase in the sales of tubular and other products. The
increase in tubular sales reflects a continuing acceptance of the Company's line
of Westin tubular truck accessories in the light duty pickup and sport utility
aftermarket. The decline in bumper sales reflects a general decline in the
demand for aftermarket bumpers. This decline is mostly due to efforts of the
original equipment ("OE") manufacturers to integrate the rear step bumpers on
light duty pickup trucks into the overall design of each new vehicle. With the
release of new OE bumper designs on 1997 models the Company is losing its
competitive advantage afforded by its current line of aftermarket bumpers.
Management believes that the Company will continue to experience significant
erosion in bumper sales in the remaining three months of 1997 and that the
decline in bumper sales will accelerate in 1998 as new OE light duty truck
models are released. Slowing this decline will be a continued demand for
Wedgestone bumpers in the crash replacement market. The crash replacement
business, however, will also decline unless the Company makes significant
investments in new tooling to replicate the new OE bumper designs. The Company
is currently examining alternatives to these tooling investments, including the
import of components that more closely conform to the appearance of the OE
bumpers. Sales of bumpers for the year
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ended December 31, 1996 represented 48% or $21,688,000 of total Company sales.
Bumper sales for the first nine months of 1997 totaled $14,663,000 compared to
$16,479,000 in 1996.
The Company continues to pursue sales of its products directly to the
OE manufacturers. For the nine months ended September 30, 1997 sales to OE
customers increased 48% to $2,473,000 compared to $1,667,000 for the same period
in 1996. In response to OE quality requirements the Company received its ISO
9001 / QS 9000 rating on June 9, 1997. During the quarter ended June 30, 1997,
the Company received new production awards from Mercedes Benz, Subaru, and
Nissan for products to be made in its Irwindale, California facility. Initial
sales on these agreements totaled $988,000 in sales for the quarter ended
September 30, 1997. The Company also received a production award from Ford in
the quarter ended June 30, 1997 for product to be delivered in 1998. An
investment approximating $1,000,000 in equipment will be required to fulfill
this award. Purchase commitments for a majority of this equipment have been
made. All of the OE production awards are for tubular products. These products
are generally not a functional part of the vehicle. Future procurement of such
products by the OE manufacturers is conditional upon market acceptance of the
products as designed and upon the public's continued interest in the general
appearance of these types of accessories.
Gross margins increased $2,442,000 or 22% to $13,371,000 or 35% of
sales for the nine months ended September 30, 1997 compared to $10,929,000 or
32% of sales in 1996 which included $609,000 in gross margin losses on the sales
of Hercules' products.
Sales and marketing costs increased by $323,000 or 6% to $5,518,000 or
15% of sales for the nine months ended September 30, 1997 compared to $5,195,000
or 15% of sales in 1996. The increase is due to additional advertising and
promotional costs incurred by the Company to further penetrate the traditional
and retail market segments for Westin tubular products. 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 $869,000 or 24% to $4,541,000 for the
nine months ended September 30, 1997 compared to $3,672,000 in 1996. Product
design and development costs account for 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.
Other income for the nine months ended September 30, 1997 consists of
the gain on the sale of the Company's 21 acres of land known as the College
Point property.
Interest expense decreased $228,000 or 26% to $648,000 for the nine
months ended September 30, 1997 compared to $876,000 in 1996. This decrease is
attributable to the decrease in debt associated with Hercules and to the
decrease in interest rates in 1997 compared to 1996. Interest rates were further
reduced in the second quarter as a result of the amended and restated CIT credit
facility.
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.
-11-
<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) Exhibits:
None.
(b) Reports on Form 8-K:
None.
-12-
<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: November 14, 1997 By: /s/ Eric H. Lee
--------------------
Chief Financial Officer
(Principal 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.
-13-
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