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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the period ended
DECEMBER 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
(626) 338-3555
(Address, including zip code and telephone number, including
area code of registrant's principal executive offices)
---------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
SHARES OF BENEFICIAL INTEREST, $1.00 PAR VALUE
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained here, and will not be contained, to the best
of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[ 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 February 6, 1998, 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 $ 2,720,000 based on the last
reported sale price of the shares at that date.
Total number of pages in this document: 43 Exhibits at page: 37
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
A. INTRODUCTION AND BACKGROUND
Wedgestone Financial ("Wedgestone" or the "Company"), a Massachusetts
business trust which was organized in 1980, commenced operations as a real
estate investment trust under the Internal Revenue Code of 1986, as amended, and
continued those operations through December 31, 1991. On August 9, 1991,
Wedgestone filed a petition with the United States Bankruptcy Court for the
district of Massachusetts Eastern Division (the "Bankruptcy Court") under
Chapter 11 of the United States Bankruptcy Code, Case No. 91-16930-WCH (the
"Bankruptcy Proceeding"). Wedgestone's plan of reorganization (the "Plan") was
confirmed by the Bankruptcy Court on May 5, 1992. Wedgestone operates in two
business segments as follows:
A) Automotive Products for the light duty truck aftermarket; and
B) Real Estate and Lending activities.
The business of the Automotive Products segment is conducted primarily
through Wedgestone's wholly owned subsidiary, Wedgestone Automotive Corp
("Wedgestone Automotive"), which, in turn, wholly owns the subsidiaries Fey
Automotive Products, Inc. ("Fey"), St. James Automotive Corp ("St. James"),
Sigma Plating Co., Inc. ("Sigma"). The Automotive Product segment also included
Hercules Automotive Products, Inc., a former subsidiary of the Company which
was acquired on January 9, 1995 and sold on April 18, 1996. Fey and Sigma were
acquired on November 18, 1994, and have been accounted for as a put-together,
which is similar to the pooling of interest method of accounting.
FINANCIAL INFORMATION RELATING TO BUSINESS SEGMENTS
(Amounts in Thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
REVENUES: 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
AUTOMOTIVE PRODUCTS:
Manufactured Products for Light Duty Trucks $47,604 $41,452 $39,970
Contract Plating 3,937 3,312 3,680
All Other 846 1,522 2,462
------- ------- -------
TOTAL $52,387 $46,286 $46,112
------- ------- -------
------- ------- -------
REAL ESTATE AND LENDING (a) --- --- ---
OPERATING INCOME (LOSS):
Automotive Products $ 4,488 $ 2,944 $ 3,259
Real Estate and Lending (265) (174) (529)
------- ------- -------
TOTAL $ 4,223 $ 2,770 $ 2,730
------- ------- -------
------- ------- -------
IDENTIFIABLE ASSETS:
Automotive Products $18,984 $16,221 $17,228
Real Estate and Lending 1,948 1,167 1,375
------- ------- -------
TOTAL IDENTIFIABLE ASSETS $20,932 $17,388 $18,603
------- ------- -------
------- ------- -------
</TABLE>
(a) Real Estate and Lending revenues are immaterial and reported with operating
costs.
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B. AUTOMOTIVE PRODUCTS BUSINESS SEGMENT
On June 15, 1992, Wedgestone acquired St. James Automotive Corp. This
subsidiary manufactures and sells tubular products, consisting primarily of
accessories for the light-duty truck market such as grille guards, push bars and
step rails. 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. ("Hercules"), acquired
substantially all of the assets of Hercules Bumpers, Inc., a Georgia company.
This acquisition was intended to provide greater access to the dealer direct
business segment for Wedgestone Automotive. The segment involved 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. During 1995, a major Original
Equipment Manufacturer ("OEM") 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 significant 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 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. The Pelham, Georgia manufacturing plant along with its inventory and
accounts receivable constituted all of the material assets of Hercules. There
are no remaining assets of Hercules.
Wedgestone Automotive manufactures and distributes automotive aftermarket
products for the light duty truck market. Principal products include rear
bumpers; tubular products such as grille guards, push bars, and step rails; and
various other related aftermarket products. Additionally, Sigma provides
contract chrome plating services to other unrelated parties. Combined sales for
all products were $52,387,000, $46,286,000 and $46,112,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
The Company's automotive products are sold in the following markets:
TRADITIONAL AFTERMARKET: This market includes dealership replacement
parts departments, body shops, speed shops, off-road specialty shops
and van and truck converters. Wedgestone Automotive reaches these
customers through an established network of warehouse distributors,
jobbers, dealer expediters and specialty wholesalers.
ORIGINAL EQUIPMENT AFTERMARKET: Utilizing products specifically
approved by truck manufacturers including Ford, General Motors,
Mercedes-Benz, Nissan and Subaru, Wedgestone Automotive ships
directly into their distribution channels in order to take advantage
of factory supported sales of its truck accessories through dealer
level service parts operations.
RETAIL AFTERMARKET: Wedgestone Automotive reaches the retail
consumer through local, regional and national chains dedicated to
automotive products as well as independent retailers whose stores
support a large assortment of automotive product lines.
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
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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, particularly 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
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.
On February 9, 1998 the Company announced a Tender Offer (the "Offer" or
"Tender Offer") to acquire all of the issued and outstanding shares of the
Company, including vested stock options and warrants, not owned by certain
majority shareholders which include Stockwood LLC, JCS Management Co. Inc., PFG
Corporation, RAB Management Corp., and JMS Holdings Co., Inc. whom collectively
own 62.1% of the current issued and outstanding shares. The Offer price is $
.67 net per share to sellers in cash. On February 6, 1998, the last full
trading day before the Offer, the price was $ .35 per share. Shares not
tendered will be converted into the right to receive $ .67 per share in a merger
to be consummated as soon as practical after the tender offer.
SIGNIFICANT CUSTOMERS, COMPETITIVE POSITION, INTELLECTUAL PROPERTY
There is no single customer whose purchases exceeded 10% of Wedgestone
Automotive's sales. The sectors of the automotive industry in which Wedgestone
operates are extremely competitive and heavily influenced by policies and
programs implemented by the OE Manufacturers. The companies servicing
Wedgestone Automotive's markets with competing products vary in size and
capability with none dominating the market as a whole. All such companies
compete on the basis of product design, availability, lead time, price and
product performance. Wedgestone Automotive has no patents, franchises or
concessions. It markets its products under various trade names including FEY,
TUFF BAR AND WESTIN and holds registered trademarks on the names QUAD TUBE,
SURSTEP, CONTOUR and DIAMONDSTEP.
RAW MATERIALS, DISTRIBUTION, INVENTORIES AND SEASONALITY
Raw materials are purchased under standard industry terms through a number
of vendors located within the vicinity of the plant being served. Management
does not anticipate any shortages of materials. Wedgestone Automotive utilizes
direct sales personnel and manufacturer's representatives to market its products
which are distributed through the manufacturing facilities in California and
Minnesota and further through distribution warehouses in Utah and Texas.
Sales are primarily serviced out of finished goods inventories. For this
reason, inventories are a material portion of the Company's operating assets.
The Company schedules manufacturing to maintain desired inventory levels. Order
backlogs for Wedgestone Automotive totaled $4,594,000 as of December 31, 1997,
as compared to $2,300,000 as of December 31, 1996. This growth is attributed to
the growing demand for Westin products manufactured at St. James as well as
orders received under new OE supplier agreements which increase the order
backlog due to the OE manufacturers tendency to schedule orders several weeks in
advance of required deliveries. While the automotive aftermarket is not
considered to be seasonal, it is subject to the annual effects of new model
introductions and, as such, business can increase in the fall after new models
are released and in the spring as dealers seek to move inventory in anticipation
of the next model year.
SUBSIDIARY OPERATIONS; EMPLOYEES, AND FACILITIES
As of February 19, 1998, Wedgestone Automotive manufactures its products in
several subsidiaries as follows:
3
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<TABLE>
<CAPTION>
Facility Square Footage Employees Products
-------- -------------- --------- --------
<S> <C> <C> <C>
Fey Automotive Products, Inc. 89,000 180 Bumpers, Step Rails &
Related Products
St. James Automotive Corp. 95,000 200 Bumpers, Grille Guards,
Step Bars & other Tubular
Products
Sigma Plating Co., Inc. 26,000 100 Intercompany and outside
------- --- contract plating services
210,000 480
------- ---
------- ---
</TABLE>
The manufacturing employees of Fey are represented by a union whose
contract expires in March 1999. Employees at Sigma and St. James are not
subject to a collective bargaining agreement. Wedgestone believes that its
relations with all of its employees are satisfactory.
Fey leases 89,000 square feet of manufacturing, warehousing and office
space located in Irwindale, California, approximately 30 miles east of Los
Angeles. Fey also leases distribution warehouses in Salt Lake City, Utah and
North Richland Hills, Texas. The leases expire at various times through 2002.
St. James leases a 95,000 square foot facility in St. James, Minnesota,
which is approximately 120 miles southwest of Minneapolis. The lease obligation
extends through October 31, 1998. The lease contains a purchase option for the
facility. St. James also leases a warehouse facility in Fairmont, Minnesota
under a two year agreement that includes an option to purchase the property.
Sigma owns a 26,000 square foot facility on 3 acres of land in La Puente,
California, approximately 25 miles east of Los Angeles.
ENVIRONMENTAL MATTERS
St. James and Sigma operate chrome plating facilities. Hazardous wastes
generated by these operations are disposed of in the normal course for this
type of business. Aqueous wastes are treated at the facility to meet applicable
regulatory standards and then discharged to the public treatment works. Solid
wastes and by-products are transported to a recycler for processing and
destruction. All current activities at the facilities are believed to be within
the operational parameters of the required environmental permits and are
monitored both internally by facility personnel and periodically by regulatory
agencies. In anticipation of expanding the St. James facility and its
operations, St. James conducted tests which revealed environmental
contamination by a previous operator/tenant. St. James notified the principal
shareholder of the prior operator, who is also the landlord, and the relevant
regulatory authorities of the test results. St. James has been partially
indemnified from costs relating to potential clean-up by the principal
shareholder of the landlord. St. James, working in conjunction with local,
state and federal authorities, has performed the remediation work required on
this site. Post remediation site approval has been granted. The Company does
not anticipate any material expenditures in 1998 in connection with compliance
with environmental regulations.
C. REAL ESTATE AND LENDING SEGMENT
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.
REAL ESTATE ACQUIRED BY FORECLOSURE
Wedgestone owned three properties that were acquired by foreclosure, one of
these was sold in 1997. The remaining properties include four vacant
first-floor units in a seven-story condo building in Peabody, Massachusetts and
53 acres of undeveloped land in Bristol, Connecticut. The Company does not
intend to develop the Bristol, Connecticut property at the present time. If the
Company did decide to develop this property, the Company would require the
assistance of a real estate development partner.
On January 31, 1997, the Company signed a contract for the sale of
approximately 21 acres of land in Queens, New York, 15 acres of which are below
water (the "College Point" property) for $1.375 million less expenses of
$42,200. Of this amount, $137,500 was tendered upon signing of the agreement
and the balance, $1,237,500, was received at closing on February 27, 1997. The
book value of this property as of December 31, 1996 was $914,800. The Company
recognized a gain
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of $418,000 in 1997 on this transaction.
PROMISSORY NOTES AND CLAIMS RECEIVABLE
Wedgestone had one outstanding loan receivable on one property in Sebago
Lake, Maine, the aggregate value of which totaled approximately $81,000 as of
December 31, 1996, net of reserves. On November 10, 1997, in connection with the
sale of the Sebago property, the Company received full payment on this loan
receivable.
ENVIRONMENTAL MATTERS
Under the Comprehensive Environmental Response Compensation and Liability
Act of 1983, as amended ("CERCLA"), an owner or operator of property (including,
in certain circumstances, a lender who takes title by foreclosure or who
participates in the management of the property) may be liable to reimburse the
federal government or a third party for the cost of cleaning up oil or hazardous
substances found on the property. Many states in which Wedgestone conducts
business, including Massachusetts, have enacted similar statutes ("Superfund
Laws"), under which an owner or operator of property (including a foreclosing
lender or a lender who actively participates in the management of the property)
may be liable to reimburse the state government or a third party for clean-up
costs and to compensate the state or any other person for injuries or damages
caused by oil or hazardous-substance contamination. The liability created by
CERCLA and the state Superfund Laws is joint and several subject, in a limited
number of cases, to certain defenses.
A number of states in which Wedgestone conducts business, including
Massachusetts, also allow the state to impose a lien on the property of a liable
party as security for the payment of clean-up costs. Many of these
jurisdictions provide that this lien, at least as it pertains to the
contaminated property, is senior to all pre-existing liens. Accordingly, if real
estate securing a Wedgestone loan were found to contain oil or hazardous
substances, enforcement of a state Superfund Law could significantly reduce the
value of Wedgestone's lien. In the event real estate owned or controlled by
Wedgestone pursuant to foreclosure or exercise of other remedies under its loan
documents were found to contain hazardous substances, enforcement of a state
Superfund Law or CERCLA could potentially require expenditure of funds in
amounts which may have a significant adverse impact upon Wedgestone's earnings,
capital expenditure requirements and liquidity.
NET OPERATING LOSS
Wedgestone has a net operating loss carry forward for federal income tax
purposes of approximately $38,123,000 as of December 31, 1997.
ITEM 3. LEGAL PROCEEDINGS
BANKRUPTCY CLAIMS
An appeal was filed against the Company on May 25, 1995, by a holder of
the Company's formerly issued Special Income Shares (the "Income Shares").
The Income Shares were designated to receive a distribution of any excess
"profit or appreciation" realized by the Company on certain specific
mortgages and notes receivable. The one remaining outstanding loan under
which income rights had been granted related to a loan the Company
participated in with a bank. This bank subsequently was liquidated and the
FDIC assumed control. The FDIC approached the Company to seek approval to
foreclose on the note since it was in default. Since the Company was
involved in a bankruptcy proceeding, the Company sought bankruptcy court
approval to proceed on the foreclosure action. In the motion seeking such
approval was a request that (i) the FDIC remit to the Company any excess
proceeds from the note, (ii) the Company cancel the Special Income Shares
since this note was the sole remaining loan and (iii) the Company pay any
funds, net of costs and fees collected from the FDIC to the holders of Income
Shares as a liquidating distribution. This motion was approved by the
bankruptcy court and the appeal was instituted. On January 6, 1998 the
appeal was denied.
OTHER
A complaint was filed against Fey, a wholly owned subsidiary of Wedgestone
Automotive Corp ("WAC"), on September 10, 1996, in the Superior Court of
Mitchell County in the state of Georgia, by Mitchell Real Estate Partnership, C.
Ray Council, Hal A. Council, Max R. Council, Rex A. Council, June Council Hunter
and Gay Council Moring (collectively, "Mitchell"). In its complaint, Mitchell
asserts breach of contract and fraud claims against the defendants resulting
from a Marketing Agreement between Mitchell, Fey and HAP for marketing
consulting services relating to Hercules products, alleging, among other things,
that Fey has impeded Mitchell's ability to earn commissions under the Marketing
Agreement. Mitchell seeks monetary damages in excess of $4 million. Fey and
the other defendants have removed the case to the United States District Court
for the Middle District of Georgia. Fey and the other defendants have filed a
motion to dismiss the case. Fey has
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agreed to extend the period for filing a responsive pleading pending the
resolution of the procedural issues. Additional named defendants are John C.
Shaw, chairman and trustee of the Company, Jeffrey S. Goldstein, a trustee of
the Company, James J. Pinto, the President of PFG Corporation, which holds in
excess of 5% of the Company's shares, and David L. Sharp, the Chief Executive
Officer of WAC and President of the Company. This litigation is in the
initial stages and as of February 13, 1998, no discovery has taken place.
Fey and the other defendants believe Mitchell's claims are without merit and
intend to vigorously contest the Mitchell complaint and pursue counter claims
and affirmative defenses. Management is unable to evaluate the likelihood of
an unfavorable outcome or estimate the amount or range of potential loss, if
any.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Wedgestone's shares of beneficial interest are currently traded in the
over-the-counter market under the trading symbol "WDGF". The prices set forth
below represent trades between dealers, without adjustment for retail mark up,
mark down or commission, and do not necessarily represent actual transactions.
The following table sets forth the high and low bid prices of Wedgestone's
shares of beneficial interest for each quarter of 1997 and 1996.
<TABLE>
<CAPTION>
Market Price Range
---------------------------------
1997 1996
-------------- -------------
<S> <C> <C> <C> <C>
Quarter High Low High Low
------- ---- ---- ---- ----
First .37 .32 .25 .20
Second .32 .26 .60 .22
Third .27 .27 .60 .35
Fourth .27 .27 .45 .31
----------------------------------
</TABLE>
On February 6, 1998, the bid price of Wedgestone's shares of beneficial
interest was $ .35.
RECORD HOLDERS
On February 19, 1998, there were approximately 3,100 holders of record
Wedgestone's shares of beneficial interest.
CASH DIVIDENDS DECLARED AND PAID PER SHARE
There were no dividends declared or paid by Wedgestone on its shares of
beneficial interest for the years ended December 31, 1991 through 1997.
Wedgestone presently intends to retain all earnings in connection with its
business. Payment of dividends in the future will be within the discretion of
the Board of Trustees and will depend upon, among other factors, earnings and
the operating and financial condition of the business.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from Wedgestone's
Consolidated Financial Statements and should be read in conjunction with the
Management Discussion and Analysis and the Consolidated Financial Statements and
related notes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
OPERATING DATA: (In Thousands)
Net sales $52,387 $46,286 $46,112 $34,618 $29,472
Net Income (loss) $ 2,946 $ 1,372 $ 1,845 $ 1,493 ($ 116)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
PER SHARE DATA:
Net income (loss) basic and diluted $ .13 $ .06 $ .08 $ .07 ($ .01)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighted average
Shares outstanding basic and
diluted 21,885,668 21,885,668 21,764,280 20,385,668 20,385,668
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA: (In Thousands)
Working Capital $ 8,511 $ 5,324 $ 4,188 $ 3,418 $ 2,390
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total assets $22,543 $20,350 $21,398 $14,391 $11,530
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Long-term debt $ 5,364 $ 5,269 $ 8,447 $ 5,676 $ 3,835
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total shareholders' equity $ 8,293 $ 7,119 $ 5,747 $ 3,382 $ 2,558
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
8
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
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 former 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, involved 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,
Georgia manufacturing plant along with the then existing 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, management believes that the 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 required 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, particularly 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
markets will require significant investments in tooling, processes and
9
<PAGE>
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.
On February 9, 1998 the Company announced a Tender Offer (the "Offer" or
"Tender Offer") to acquire all of the issued and outstanding shares of the
Company not owned by certain majority shareholders which include Stockwood LLC,
JCS Management Co. Inc., PFG Corporation, RAB Management Corp., and JMS Holdings
Co., Inc. whom collectively own 62.1% of the current issued and outstanding
shares. The Offer price is $ .67 net per share to sellers in cash. Shares not
tendered will be converted into the right to receive $ .67 per share in a merger
to be consummated as soon as practical after the Tender Offer. The Company has
arranged for financing the Offer through its primary lender, The CIT Group /
Credit Finance. The arrangements include additional borrowings under the
Company's current revolver credit line approximating $3,000,000, additional
advances under equipment financing term notes approximating $500,000 and an 18
month term note for $1,500,000. The Company will use approximately $1,000,000
of existing cash to fund the balance of the $6,000,000 estimated cost pf the
Tender Offer assuming that all shares are tendered.
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. See Note 8 to the Consolidated Financial Statements.
Cash flows from operations totaling $3,315,000 were supplemented by
$682,000 in additional advances by unsecured creditors and a reduction of
$127,000 in other assets. These funds were used to provide $2,922,000 in
additional working capital consisting of $1,469,000 in additional advances to
customers, $1,364,000 in inventories and $89,000 in other current assets
resulting in net cash provided by operations totaling $1,202,000 in 1997
compared to $280,000 in 1996. Net cash flows from operations were further
supplemented by collections on mortgage notes totaling $166,000, net proceeds
from the sale of real estate totaling $1,328,000 and additional borrowings on
long-term debt totaling $1,572,000. During 1997, the Company invested $825,000
in new equipment, made payments on long-term debt totaling $860,000, reduced
revolving debt by $375,000 and entered into a note receivable with a related
party totaling $1,650,000 for a net increase in cash of $558,000 in 1997
compared to a decrease of $21,000 in 1996.
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 and owns
6,795.223 shares of beneficial interest in Wedgestone Financial.
On February 9, 1998, the Company signed a commitment letter with The CIT
Group / Credit Finance ("CIT") in connection with its Tender Offer. The
agreement provides additional term loans on equipment totaling approximately
$500,000, an 18 month term loan for $1,500,000, and raises the Company's overall
credit line with CIT to $13,000,000. Interest on the new loans are unchanged
from the Company's current rates which are prime plus 1.375%. (Aggregating
9.75% as of February 6, 1998.) The Company will use approximately $3,000,000 in
additional borrowings under its existing revolving credit line with CIT to fund
the balance of the Tender Offer costs.
On March 18, 1997, the Company amended and restated the agreement with CIT
to a five-year $10 million credit facility collateralized by substantially all
of the assets of the Company's wholly owned subsidiaries, 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.
All loans are stated at the lender's prime rate plus 1.375% (9.75% at December
31, 1997).
In connection with the acquisition of Hercules on January 9, 1995, a former
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.
10
<PAGE>
The Company is currently addressing its computer systems and business
processes to ensure that its systems will be capable of processing periods for
the year 2000 and beyond as well as ensure that its business processes will be
able to support current and anticipated future computer system needs. The
Company does not anticipate the costs associated with addressing the foregoing
capabilities will have a material adverse impact on the Company's financial
position or results of operations.
RESULTS OF OPERATIONS
CURRENT YEAR PERFORMANCE: 1997 COMPARED TO 1996
Net sales increased $6,101,000 or 13% to $52,387,000 in 1997 compared to
$46,286,000 in 1996. This reflects a $7,415,000 increase in the sales of
products manufactured in the Company's St. James subsidiary and a $2,255,000
decrease in the products manufactured in the Company's Fey subsidiary.
Contributing to Fey's decline in net sales is a $4,014,000 decline in the
Company's Traditional and Retail market segments for bumpers, offset by a
$2,700,000 increase in the Company's OE manufacturers 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 $3,534,000 or 24% to $18,259,000 or 35% of sales in
1997 compared to $14,725,000 or 32% of sales in 1996. This increase is due to
the increase in sales, a more favorable product sales mix and a greater return
on fixed and semi fixed costs in 1997 over 1996.
Sales and marketing costs increased by $366,000 or 5% to $7,593,000 or 15%
of sales in 1997 compared to $7,227,000 or 16% of sales in 1996. This increase
is due to increases in selling costs incurred to support the higher sales
volumes achieved in 1997.
Administrative costs increased by $1,715,000 or 36% to $6,443,000 in 1997
compared to $4,728,000 in 1996. Product design and development costs account
for 43% or $746,000 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 and that overhead expenditures in this area
totaling $849,000 in 1997 are expected to increase in 1998. The remainder of
the increase in administrative costs include operating costs associated with new
EDP systems, insurance and other costs associated with sales growth in 1997 over
1996.
Interest expense decreased $290,000 or 26% to $836,000 in 1997 compared to
$1,126,000 in 1996. This decrease is attributable to the decrease in interest
rates experienced in connection with the lower interest rate on the restated CIT
credit line, reductions of outstanding borrowings under the revolver and
$122,000 in interest income recorded in 1997 on notes receivable from
Shareholders.
Other income consists of the gain on the sale of the Company's 21 acres of
land known as the College Point property.
Income taxes in 1997 reflect a $1,242,000 adjustment to the Company's
valuation reserve. The adjustments are due to management's expectations of the
Company's ability to utilize its net operating loss carry forwards due to its
more recent earnings performance.
PRIOR PERFORMANCE: 1996 COMPARED TO 1995
Net sales increased $174,000 to $46,286,000 in 1996 compared to
$46,112,000 in 1995. This reflects a $9,668,000 decrease in the sales of
Hercules products offset by a $6,592,000 or 67% increase in the sales of
products manufactured in the Company's St. James subsidiary and a $3,250,000
increase in the products manufactured in the Company's Fey subsidiary.
Contributing to the overall growth in net sales is a 44% and 43% increase in the
Company's Traditional and Retail market segments, respectively. Growth in these
two segments totaled $11,944,000 and was offset by a $2,102,000 or 27% decline
in the Company's Original Equipment Manufacturer's segment. The Company
continued to pursue the OE segment of the light-duty truck aftermarket and
considers this segment to be an important component of future growth. During
1996, the Company secured orders from two new OE customers whose initial 1996
sales totaled $289,000.
Gross margins increased $360,000 or 3% to $14,725,000 or 32% of sales in
1996 compared to $14,365,000 or 31% of sales in 1995. This increase is due to
an increase in sales and a more favorable product sales mix in 1996 compared to
1995.
11
<PAGE>
Sales and marketing costs increased by $501,000 or 7% to $7,227,000 or
16% of sales in 1996 compared to $6,726,000 or 15% of sales in 1995. The
majority of this increase is selling costs incurred to enhance and maintain
the higher sales volumes achieved in 1996. A significant amount 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 in 1996 and expand these markets further.
Administrative costs decreased by $182,000 or 3% to $4,727,000 in 1996
compared to $4,909,000 in 1995. This reflects a decrease of $829,000 in
administrative costs attributable to Hercules operations and an increase of
$658,000 in continuing administrative costs. Product design and development
costs account for 59% or $390,000 of this increase. Included in these costs are
salaries, benefits and overhead costs for additions to the Company's engineering
staff. The remainder of the increase in administrative costs include management
labor, insurance and other costs associated with sales growth in 1996 over 1995.
Interest expense decreased $214,000 or 16% to $1,126,000 in 1996 compared
to $1,340,000 in 1995. This decrease is attributable to the decrease in debt
associated with Hercules offset by additional borrowings under the Company's
revolving line of credit used to finance working capital growth.
Income taxes in 1996 reflect an $566,000 adjustment to the Company's
valuation reserve compared to $1,300,000 recorded in 1995. The adjustments are
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.
ACCOUNTING PRONOUNCEMENTS
In June 1997, The Financial Accounting Standards Board issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This
statement is effective for fiscal years beginning after December 15, 1997. This
Statement establishes standards for disclosure about the operating segments,
products, and services, geographic areas and major customers, as well as
descriptive information on how the operating segments were determined. The
Company has not yet determined its reportable segments under this Statement.
The Company will adopt this Statement in 1998.
FORWARD LOOKING INFORMATION
Information contained in this Form 10-K 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,
particularly dealers; continuity of a relationship with or sales to major auto
dealers; competitive pressures on sales and pricing; and increases in other
costs which cannot be recovered through improved pricing of merchandise.
12
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WEDGESTONE FINANCIAL AND SUBSIDIARIES
-------------------------------------
INDEX
Page
----
Financial Statements
Independent Auditor's Report 14
Consolidated Balance Sheets as of
December 31, 1997 and 1996 15
Consolidated Statements of Income
for the years ended December 31,
1997, 1996, and 1995. 16
Consolidated Statements of
Shareholders' Equity for the years
ended December 31, 1997, 1996, and 1995. 17
Consolidated Statements of Cash
Flows for the years ended
December 31, 1997, 1996 and 1995. 18
Notes to Consolidated Financial
Statements. 19
13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of Wedgestone Financial and
Subsidiaries:
We have audited the accompanying consolidated balance sheets of Wedgestone
Financial and Subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. Our audits also
included the consolidated financial statement schedules listed in the index at
Item 14. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Wedgestone Financial and
Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations, and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, such consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
- -----------------------
February 19, 1998
Deloitte & Touche LLP
Los Angeles, California
14
<PAGE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 and 1996
(Amounts in Thousands--except share data)
<TABLE>
<CAPTION>
ASSETS (Note 8) 1997 1996
-------- --------
<S> <C> <C>
Current Assets:
Cash $ 902 $ 344
Accounts and other receivables - (net of allowances of $344 and
$333 in 1997 and 1996, respectively) 8,751 7,282
Inventories (Note 5) 5,983 4,619
Prepaid expenses and other current assets 654 565
Deferred income taxes (Note 9) 1,107 476
-------- --------
Total Current Assets 17,397 13,286
Notes receivable - (Note 7) --- 81
Real estate acquired by foreclosure - net (Note 7) 176 1,086
Property, plant and equipment - net (Note 6) 3,342 3,237
Goodwill - net 87 130
Deferred income taxes (Note 9) 1,420 2,196
Other assets (Deposits) 121 334
-------- --------
5,146 7,064
-------- --------
Total Assets $ 22,543 $ 20,350
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line and current portion of long-term debt (Note 8) $ 2,194 $ 1,952
Accounts payable 4,488 3,882
Accrued payroll and related expenses 809 593
Other accrued expenses 1,395 1,535
-------- --------
Total Current Liabilities 8,886 7,962
Long-term debt (Note 8) 5,364 5,269
-------- --------
Total liabilities 14,250 13,231
Commitments and contingencies (Notes 10 and 12)
Shareholders' Equity: (Notes 11)
Shares of Beneficial Interest - par value $1.00 per
share: authorized -- unlimited shares;
issued and outstanding -- 21,885,668 shares
at December 31, 1997 and 1996 21,886 21,886
Additional paid-in capital 31,396 31,396
Note receivable from shareholder (1,772) ---
Accumulated deficit (43,217) (46,163)
-------- --------
Total Shareholders' Equity 8,293 7,119
-------- --------
Total Liabilities and Shareholders' Equity $ 22,543 $ 20,350
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
(Amounts in Thousands--except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 52,387 $ 46,286 $ 46,112
Cost of sales 34,128 31,561 31,747
-------- -------- --------
Gross profit 18,259 14,725 14,365
Selling, general and administrative expenses (Note 4) 14,036 11,955 11,635
-------- -------- --------
Operating income 4,223 2,770 2,730
Goodwill amortization 44 49 106
Interest expense-net (Notes 4 and 8) 836 1,126 1,340
Other (income) expense (Note 3) (418) 67 697
-------- -------- --------
Income before taxes 3,761 1,528 587
Provision (benefit) for income taxes (Note 9) 815 156 (1,258)
-------- -------- --------
Net income $ 2,946 $ 1,372 $ 1,845
-------- -------- --------
-------- -------- --------
Net income per share of beneficial interest:
Basic and diluted $ .13 $ .06 $ .08
-------- -------- --------
-------- -------- --------
Weighted average number of shares outstanding:
Basic and diluted 21,886 21,886 21,764
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
Additional
Shares of Beneficial paid-in Shareholder Accumulated
Interest capital Loans 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 (Note 1) 1,200 1,200 (840) 360
Issuance of shares of beneficial interest in
exchange for acquisition services (Note 4) 200 200 (140) 60
Issuance of shares of beneficial interest to
pay off outstanding debt (Note 1) 100 100 100
Net income 1,845 1,845
------- -------- -------- --------- -------
Balance at December 31, 1995 21,886 21,886 31,396 (47,535) 5,747
- -------
Net income 1,372 1,372
------- -------- -------- --------- -------
- -------
Balance at December 31, 1996 21,886 $ 21,886 $ 31,396 ($46,163) $ 7,119
------- -------- -------- --------- -------
Advance to shareholder ($1,772) (1,772)
Net income 2,946 2,946
------- -------- -------- ------- --------- -------
Balance at December 31, 1997 21,886 $ 21,886 $ 31,396 ($1,772) ($ 43,217) $ 8,293
------- -------- -------- ------- --------- -------
------- -------- -------- ------- --------- -------
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,946 $ 1,372 $ 1,845
Adjustments to reconcile net income to net
cash provided by operating activities:
Accrued interest receivable (122) --- ---
Write-off of note receivable --- 60 697
Depreciation and amortization 764 771 1,198
Deferred income taxes 145 (82) (1,300)
Gain on disposal of assets (418) --- ---
Loss on sale of subsidiary --- 797 ---
Changes in assets and liabilities:
Accounts and other receivables (1,469) (2,196) (109)
Inventories (1,364) (1,598) 617
Prepaid expenses and other current assets (89) (193) (177)
Accounts payable 606 1,143 333
Accrued payroll and related expenses 216 92 211
Other accrued expenses (140) 100 (1,016)
Other assets 127 14 (463)
------- ------- --------
Net cash provided by operating activities 1,202 280 1,836
------- ------- --------
Cash Flows from Investing Activities:
Proceed from sale of real estate and equipment 1,328 217 ---
Proceeds from repayment of mortgage notes receivable 166 3 1
Cash advanced to shareholder (1,650) --- ---
Acquisition costs paid -- --- (401)
Capital expenditures (825) (933) (926)
Investment in real estate --- --- (126)
------- ------- --------
Net cash used in investing activities (981) (713) (1,452)
------- ------- --------
Cash Flows from Financing Activities:
Repayment of long-term debt (860) (1,406) (949)
Deferred financing fees paid --- --- (85)
Borrowings on long-term debt 1,572 --- 635
Net borrowings (repayments) on revolving debt (375) 1,818 201
------- ------- --------
Net cash provided by (used in) financing activities 337 412 (198)
------- ------- --------
Net Increase (Decrease) in Cash 558 (21) 186
Cash at Beginning of Year 344 365 179
------- ------- --------
Cash at End of Year $ 902 $ 344 $ 365
------- ------- --------
------- ------- --------
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
WEDGESTONE FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 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 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 December 31, 1997 (See Note 7: Real
Estate and Lending).
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 Fifth Avenue Partners, 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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES - Inventories are stated at the lower of cost or market, with cost
being determined by the FIFO (first-in, first-out) method of accounting.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant and equipment are stated at
cost. Expenditures that materially increase the life of the related assets are
capitalized and maintenance and repairs are charged to expense. The costs and
related accumulated depreciation applicable to property, plant and equipment
which are sold or retired are removed from the accounts, and any gain or loss is
included in income.
19
<PAGE>
DEPRECIATION AND AMORTIZATION - Wedgestone uses the straight-line method for
depreciating property, plant and equipment over their estimated useful lives.
Buildings and improvements are depreciated from 5 to 40 years, machinery and
equipment from 3 to 10 years, furniture and fixtures from 3 to 5 years, and
leasehold improvements are amortized over the terms of the respective leases or
the life of the improvements, whichever is shorter.
GOODWILL - The Company reviews the recoverability of goodwill to determine if
there has been any permanent impairment. This assessment is performed based on
the estimated undiscounted future cash flows (excluding interest charges) from
operating activities compared with the carrying value of goodwill. If the
undiscounted future cash flows are less than the carrying value, a write-down
would be recorded, to reduce the asset to its estimated fair value. Accumulated
amortization was $175,000 and $132,000 at December 31, 1997 and 1996,
respectively. Goodwill is amortized over a period of seven years.
INCOME TAXES - Deferred tax assets and deferred tax liabilities reflect the tax
consequences in future years of differences between the income tax bases of
assets and liabilities and the corresponding bases used for financial reporting
purposes. The measurement of deferred tax assets is adjusted by a valuation
reserve, if necessary, so that the net tax benefits are recognized only to the
extent that they will more likely than not be realized.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS -
CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE, NOTES PAYABLE AND NOTE
RECEIVABLE FROM SHAREHOLDER - The carrying amounts approximate fair
value because of the short maturities of these instruments.
REVOLVING LINE OF CREDIT AND TERM LOAN - The carrying amount
approximates fair value because the interest rate is based on
variable reference rates.
CONCENTRATION OF CREDIT RISK - Financial instruments which subject the Company
to credit risk consist primarily of accounts receivable. This risk is reduced
due to the number of customers and their geographic dispersion. The Company
performs ongoing credit evaluations of its customers and maintains an allowance
for potential credit losses.
REAL ESTATE ACQUIRED BY FORECLOSURE - Real estate acquired by foreclosure is
recorded at the lower of cost or fair value less estimated selling costs.
INCOME/LOSS PER SHARE OF BENEFICIAL INTEREST - During 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share.
The Statement replaces the presentation of primary EPS with a presentation of
basic EPS, which excludes dilution and is computed by dividing income available
to shareholders of beneficial interest by the weighted average number of shares
outstanding for the period. The Statement also requires the dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
diluted EPS computation. Diluted EPS is computed similarly to fully diluted EPS
pursuant to APB Opinion No. 15. The adoption of SFAS No. 128 did not have an
effect on the Company's financial statements as other potentially dilutive
securities issued in 1997 were not dilutive. In addition, it is not necessary
to restate prior periods presented.
ACCOUNTING PRONOUNCEMENTS - In June 1997, The Financial Accounting Standards
Board issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. This statement is effective for fiscal years beginning
after December 15, 1997. This Statement establishes standards for disclosure
about the operating segments, products, and services, geographic areas and major
customers, as well as descriptive information on how the operating segments were
determined. The Company has not yet determined its reportable segments under
this Statement. The Company will adopt this Statement in 1998.
20
<PAGE>
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. Included in other expense in 1996 is a
loss on the sale of Hercules totaling $920,000
NOTE 4. RELATED PARTIES
St. James has renewed its five year consulting agreement with PSG
Associates, an affiliate of the former owners of St. James (who are also
affiliated with Wedgestone), to provide advisory services to St. James with
respect to its operations, expansion and financing activities at a minimum
rate of $125,000 per year plus reimbursement of expenses through 2002. St.
James paid $125,000 to PSG Associates for each of the years ended December
31, 1997, 1996 and 1995, respectively.
In connection with the acquisition of the Automotive Segment of Standun
Inc., Resource Holdings Associates and PFG Corp. ("PFG"), both of which are
controlled by certain Wedgestone shareholders, received a fee of $220,000, in
February 1995 consisting of $160,000 and 200,000 shares of beneficial interest
of Wedgestone at a valuation price of $.30 per share.
On January 25, 1995, Hercules entered into a five year agreement with PFG
and Wedgestone Partners, an affiliate of the aforementioned shareholders, to
provide advisory services to Hercules with respect to its operations, expansion
and financing activities at an aggregate amount of $175,000. Hercules paid
$175,000 for the year ended December 31, 1995, and $44,000 of this fee through
April 18, 1996. This agreement was terminated in conjunction with the sale of
the Company's stock ownership in Hercules.
On January 12, 1993, as amended, Wedgestone entered into a credit facility
with Rockaway 605 Corp. ("Rockaway") pursuant to which Wedgestone was permitted
to borrow up to a maximum of $300,000 with additional over advances available at
the discretion of the lender to fund Wedgestone's working capital needs and
those of its subsidiaries. As a requirement of the financing to purchase the
Automotive Segment, Wedgestone paid Rockaway $25,000 to release its lien on the
stock of St. James and certain of Wedgestone's real estate. The Rockaway Loan
was secured by a pledge of all of the stock of Wedgestone's direct subsidiaries
and notes receivable. Rockaway is a real estate holding company which is
controlled by the former shareholders of St. James. The loan was repaid in
November, 1996.
Wedgestone assumed a note associated with the termination of Standun's
management agreement with Fifth Avenue Partners, a related party of Wedgestone,
in the amount of $1,104,000 in conjunction with the acquisition of the
Automotive Segment (See Note 1).
Effective January 1, 1996, Fey Automotive Products, Inc. entered into a
four-year agreement with PFG and Resource Holdings Associates to provide
advisory services to Fey with respect to its operations, expansion and financing
activities at an aggregate amount of $180,000 per annum.
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.
NOTE 5. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following: (In Thousands)
December 31,
1997 1996
------ ------
<S> <C> <C>
Finished goods $3,056 $2,474
Work in progress 1,528 1,239
Raw materials 1,531 1,025
----- -----
6,115 4,738
Less allowances (132) (119)
------ ------
$5,983 $ 4,619
------ ------
------ ------
21
<PAGE>
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
(In Thousands)
<CAPTION>
December 31,
1997 1996
------- --------
<S> <C> <C>
Buildings and leasehold improvements $1,364 $1,229
Land 500 500
Machinery and equipment 9,022 8,440
Furniture and fixtures 1,432 1,324
------ ------
12,318 11,493
Accumulated depreciation and amortization (8,976) (8,256)
------ ------
Net property, plant and equipment $3,342 $3,237
------ ------
------ ------
</TABLE>
NOTE 7. REAL ESTATE AND LENDING
On January 30, 1997, the Company entered into an agreement to sell its 21
acres of land known as the Queens property for $1,375,000 less expenses of
$42,200. Of this amount, $137,500 was tendered upon signing of the agreement
and the balance, $1,237,500, was received upon closing on February 27, 1997.
The book value of this property as of December 31, 1996 was $914,800. The
Company recognized a gain of approximately $418,000 on this transaction.
The balance in notes receivable is as follows: (In Thousands)
<TABLE>
<CAPTION>
December 31,
1997 1996
------- --------
<S> <C> <C>
Sebago Lake Note --- 81
------ ------
$ --- $ 81
------ ------
------ ------
</TABLE>
The balance of real estate acquired by foreclosure is as follows: (In
Thousands)
<TABLE>
<CAPTION>
December 31,
1997 1996
------- -------
<S> <C> <C>
Gross investment $ 622 $ 7,644
Write down (446) (6,558)
------ -------
Net $ 176 $ 1,086
------ -------
------ -------
</TABLE>
NOTE 8. REVOLVING CREDIT LINE AND LONG-TERM DEBT
Revolving credit lines and long-term debt consist of the following: (In
Thousands)
<TABLE>
<CAPTION>
December 31,
1997 1996
------ ------
<S> <C> <C>
Revolving credit line with The CIT Group/Credit Finance,
interest at prime plus 1.375% (9.75% at December 31, 1997) $5,677 $5,394
Term loan with The CIT Group/Credit Finance, interest
at prime plus 2.5% (10% at December 31, 1996) --- 696
Term loan with The CIT Group/Credit Finance, interest
at prime plus 2.5% (10% at December 31, 1996) --- 351
Term loan with The CIT Group/Credit Finance, interest
at prime plus 1.375% (9.75% at December 31, 1997) 1,336 ---
Notes payable to Fifth Avenue Partners, interest at 9%,
payable in monthly installments of $22,917 through
December 31, 1999 505 720
Other 40 60
------ ------
Total 7,558 7,221
Less current portion of long-term debt (2,194) (1,952)
------ ------
Total long-term debt $5,364 $5,269
------ ------
------ ------
</TABLE>
22
<PAGE>
The contractual payments of principal on long-term debt are due as follows:
$2,194,000 in 1998, $581,000 in 1999, $319,000 in 2000, $320,000 in 2001 and
$4,121,000 in 2002.
In connection with the Tender Offer (the "Offer" or "Tender Offer")
described in Note 11, the Company has arranged for financing the Offer through
its primary lender, The CIT Group / Credit Finance. The arrangements include
additional borrowings under the Company's current revolver loan approximating
$3,000,000, additional advances under equipment financing term notes
approximating $500,000 and an 18 month term note for $1,500,000. The Company
will use approximately $1,000,000 in existing cash to fund the balance of the
$6,000,000 estimated Tender Offer price assuming that all ofthe shares are
tendered.
On March 18, 1997, the Company amended and restated the agreement with CIT
to a five-year $10 million credit facility collateralized by substantially all
of the assets of the Company's wholly owned subsidiaries, 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.
All loans are stated at the lender's prime rate plus 1.375% (9.75% at December
31, 1997).
Wedgestone assumed a note associated with the termination of Standun's
management agreement with Fifth Avenue Partners, a related party of Wedgestone,
in the amount of $1,104,000 in conjunction with the acquisition of the
Automotive Segment (See Note 1).
NOTE 9. INCOME TAXES
Wedgestone previously operated as a real estate investment trust ("REIT")
under certain sections of the Internal Revenue Code. Wedgestone lost its REIT
status when it emerged from bankruptcy in August 1992, and as such, income is
taxed at the Wedgestone level. Wedgestone currently has a net operating loss
carry forward of approximately $36,800,000 for federal Income tax purposes.
These losses expire in various years from 2004 to 2008.
In connection with the acquisition of the Automotive Segment, a tax
benefit of $440,000 which was attributable to the increase in tax basis of
the Automotive Segment's assets was allocated to additional paid-in capital.
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -------
<S> <C> <C> <C>
Current $ 670 $ 238 $ 42
Deferred 1,387 484 168
Change in valuation allowance (1,242) (566) (1,468)
------ ----- -------
$ 815 $ 156 ($ 1,258)
------ ----- -------
------ ----- -------
</TABLE>
23
<PAGE>
Deferred income tax assets were comprised of the following:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Net operating loss carry forward $ 12,793 $ 13,673
Accruals/Reserves 960 1,065
Depreciation 139 320
Basis difference on automotive segment assets acquired 473 440
Basis difference in real estate 189 443
-------- --------
Total deferred tax assets 14,554 15,941
Less valuation allowance (12,027) (13,269)
-------- --------
Net deferred tax assets 2,527 2,672
Less current deferred tax assets (1,107) (476)
-------- --------
Noncurrent deferred tax assets $ 1,420 $ 2,196
-------- --------
-------- --------
</TABLE>
The following is a reconciliation between the income taxes computed at the
Federal statutory rate and the provision for income taxes:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- ----------
<S> <C> <C> <C>
Income taxes computed at the
Federal statutory rate 34.00% 34.00% 34.00%
State income taxes, net of
Federal benefit 3.60% 11.03% 6.00%
Basis difference from sale of subsidiary 5.37% --- ---
Other 11.72% 3.91% (4.30)%
Change in valuation allowance (33.02%) (38.73%) (250.01%)
------- -------- ----------
21.67% (10.21%) (214.31%)
------- -------- ----------
------- -------- ----------
</TABLE>
NOTE 10. COMMITMENTS AND CONTINGENCIES
Wedgestone is obligated under various cancelable and non cancelable
operating leases for manufacturing facilities, machinery and equipment. These
leases expire annually through August 31, 2002. Future minimum annual lease
commitments are as follows:
<TABLE>
<S> <C>
1998 $1,362
1999 1,247
2000 1,168
2001 909
2002 415
------
Total minimum lease payments $5,101
------
------
</TABLE>
Total net rental expense under the terms of various building and equipment
leases was $1,185,000, $904,000 and $980,000 for the years ended December 31,
1997, 1996 and 1995, respectively. There is a purchase option in the St. James
manufacturing facility lease in the amount of $500,000, subject to certain
offsets, exercisable at any time upon repayment of the mortgages which expire
concurrently with the sub-lease on October 31, 1998.
NOTE 11. STOCK OPTION AND PROFIT SHARING PLANS
During 1996, Wedgestone created the Wedgestone Financial 1996 Stock Option
Plan (the "Option Plan"). The Plan carries an effective date of December 31,
1996. Officers, other key employees and significant non-employees who are
responsible for or contribute to the management, growth and/or profitability of
the business of Wedgestone are eligible to be granted stock options under the
Option Plan. The Option Plan replaces and supersedes a former stock option plan
established in 1995.
The optionees under the Option Plan will be selected from time to time by
the Committee (a group of individuals appointed by the Trustees). The stock
options granted under the Option Plan may be of two types: (i) Incentive Stock
Options and (ii) Non-Qualified Stock Options. The option price per share of
stock under a stock option will be determined by the Committee at the time of
grant. The option price with respect to an incentive stock option shall not be
less than 100% of the fair market value of the Wedgestone stock on the date of
the option grant. The option price with respect to a non-qualified stock option
shall not be less than 85% of the fair market value of the stock on the date of
the option grant. The stock options can
24
<PAGE>
be exercised at such times as determined by the Committee. The stock which
is acquired through the exercise of the stock option, is required to be held
for investment and not for resale or other distribution. Wedgestone has
reserved 1,000,000 shares of its stock to be used for the Option Plan. During
1997, 812,800 options were granted and were immediately exercisable. None
were exercised.
Changes in the number of shares subject to options during the year ended
December 31, 1997, are summarized as follows:
<TABLE>
<CAPTION>
Wtd Avg
Number of Exercise
Options Price
--------- --------
<S> <C> <C>
Outstanding at beginning of year ---
Options granted at $ .31 share 812,800 .31
Options exercised ---
Options canceled or expired ---
------- -----
Outstanding at end of year 812,800 $ .31
------- -----
------- -----
Exercisable at end of year 812,800 $ .31
------- -----
------- -----
Weighted Average Remaining Contractual Life 4.00 yr
-------
-------
</TABLE>
The Company applies APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations in accounting for its employee stock
option plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans. Pro forma net income and net income per share
had the Company accounted for stock options issued to employees in accordance
with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997
------
<S> <C>
Net income-as reported $2,946
Net income-pro forma $2,922
Net income per share (basic and diluted)-as reported 0.13
Net income per share (basic and diluted)-pro forma 0.13
</TABLE>
The pro forma effects of applying SFAS No. 123 may not be representative of
the effects on reported net income and net income per share for future years
since options may vest over several years and additional awards are made each
year.
The fair value of the Company's stock options used to compute pro forma net
income and pro forma earnings per share disclosures is the estimated value using
the Black-Scholes option-pricing model. The weighted average fair value per
share of options granted in 1997 is $.05. The following assumptions were used
in completing the model:
<TABLE>
<CAPTION>
1997
------
<S> <C>
Dividend yield 0.0%
Expected volatility 57.0%
Risk-free rate of return, annual 6.5%
Expected life 1 year
</TABLE>
In 1995 two outside directors were each granted 15,000 warrants to acquire
shares of beneficial interest in Wedgestone at an exercise price of $.25 per
warrant share. The warrants may be exercised at any time from the date of grant
until October 31, 1998. The warrants or the warrant shares may not be disposed
of or encumbered, except in accordance with certain provisions of the Securities
Act of 1933. As of December 31, 1997, none of the warrants were exercised.
In January 1995, the Company established the Wedgestone Automotive Corp
Retirement Savings Plan (the "Retirement Plan"). The Retirement Plan provides
that all eligible employees of the Company who have attained the age of 21, have
completed one year of employment and are not subject to a collective bargaining
agreement are permitted to contribute
25
<PAGE>
up to 15% of their salary to the Retirement Plan. The Company makes
contributions on behalf of each participant of a matching amount up to an
employee contribution of 2% of such employee's salary. Employees are fully
vested at all times with respect to all employee contributions to the
Retirement Plan.
On February 9, 1998 the Company announced a Tender Offer (the "Offer" or
"Tender Offer") to acquire all of the issued and outstanding shares of the
Company not owned by certain majority shareholders which include Stockwood
LLC, JCS Management Co. Inc., PFG Corporation, RAB Management Corp., and JMS
Holdings Co., Inc. whom collectively own 62.1% of the current issued and
outstanding shares. The Offer price is $ .67 net per share to sellers in
cash. Shares not tendered will be converted into the right to receive $ .67
per share in a merger to be consummated as soon as practical after the tender
offer. Under the provisions of the Option Plan, option holders as of the
date of the Tender Offer, to the extent they are vested, will be included in
the total shares to be purchased. As of February 13, 1998, all such option
holders are fully vested and under the Option Plan, are granted the right to
exercise their options in conjunction with the Tender Offer in a cashless
based exercise transaction whereby they would receive the Tender price per
share less the exercise price per share of $.31.
The contributions to Wedgestone's Retirement Plan were $21,600 and $20,700
for the years ended December 31, 1997 and 1996, respectively.
NOTE 12. LITIGATION
BANKRUPTCY CLAIMS
An appeal was filed against the Company on May 25, 1995, by a holder of
the Company's formerly issued Special Income Shares (the "Income Shares"). The
Income Shares were designated to receive a distribution of any excess "profit or
appreciation" realized by the Company on certain specific mortgages and notes
receivable. The one remaining outstanding loan under which income rights had
been granted related to a loan the Company participated in with a bank. This
bank subsequently was liquidated and the FDIC assumed control. The FDIC
approached the Company to seek approval to foreclose on the note since it was in
default. Since the Company was involved in a bankruptcy proceeding, the Company
sought bankruptcy court approval to proceed on the foreclosure action. In the
motion seeking such approval was a request that (i) the FDIC remit to the
Company any excess proceeds from the note, (ii) the Company cancel the Special
Income Shares since this note was the sole remaining loan and (iii) the Company
pay any funds, net of costs and fees collected from the FDIC to the holders of
Income Shares as a liquidating distribution. This motion was approved by the
bankruptcy court and the appeal was instituted. The appeal was denied on
January 6, 1998.
OTHER
A complaint was filed against Fey, a wholly owned subsidiary of Wedgestone
Automotive Corp ("WAC"), on September 10, 1996, in the Superior Court of
Mitchell County in the state of Georgia, by Mitchell Real Estate Partnership, C.
Ray Council, Hal A. Council, Max R. Council, Rex A. Council, June Council Hunter
and Gay Council Moring (collectively, "Mitchell"). In its complaint, Mitchell
asserts breach of contract and fraud claims against the defendants resulting
from a Marketing Agreement between Mitchell, Fey and HAP for marketing
consulting services relating to Hercules products, alleging, among other things,
that Fey has impeded Mitchell's ability to earn commissions under the Marketing
Agreement. Mitchell seeks monetary damages in excess of $4 million. Fey and
the other defendants have removed the case to the United States District Court
for the Middle District of Georgia. Fey and the other defendants have filed a
motion to dismiss the case. Fey has agreed to extend the period for filing a
responsive pleading pending the resolution of the procedural issues. Additional
named defendants are John C. Shaw, chairman and trustee of the Company, Jeffrey
S. Goldstein, the former President and a current trustee of the Company, James
J. Pinto, the President of PFG Corporation, which holds in excess of 5% of the
Company's shares, and David L. Sharp, the Chief Executive Officer of WAC and
President of the Company. This litigation is in the initial stages no
discovery has taken place. Fey and the other defendants believe Mitchell's
claims are without merit and intend to vigorously contest the Mitchell complaint
and pursue counter claims and affirmative defenses. Management is unable to
evaluate the likelihood of an unfavorable outcome or estimate the amount or
range of potential loss, if any.
26
<PAGE>
NOTE 13. SEGMENT INFORMATION
Wedgestone principally operates in two business segments: Automotive
products and real estate and lending. The Automotive Segment manufactures
aftermarket automotive accessories which are sold and distributed throughout the
United States. The real estate activities include the sale of properties
previously acquired by foreclosure.
Financial Data By Business Segment: (In Thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
REVENUE:
Automotive Products $52,387 $46,286 $46,112
------- ------- -------
------- ------- -------
INCOME:
Automotive Products $4,488 $ 2,944 $ 3,259
Real Estate and Lending (265) (174) (529)
------- ------- -------
Total Operating Income 4,223 2,770 2,730
Other Expenses including Taxes (1,277) (1,398) (885)
------- ------- -------
Net Income $2,946 $ 1,372 $ 1,845
------- ------- -------
------- ------- -------
IDENTIFIABLE ASSETS:
Automotive Products $18,984 $16,221 $17,228
Real Estate and Lending 1,948 1,167 1,375
------- ------- -------
Total Identifiable Assets 20,932 17,388 18,603
Corporate Assets 1,611 2,962 2,795
------- ------- -------
Total Consolidated Assets $22,543 $20,350 $21,398
------- ------- -------
------- ------- -------
CAPITAL EXPENDITURES:
Automotive Products $ 825 $ 933 $ 926
------- ------- -------
------- ------- -------
DEPRECIATION:
Automotive Products $ 720 $ 771 $ 1,092
------- ------- -------
------- ------- -------
</TABLE>
NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
<TABLE>
<CAPTION>
(In Thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest $ 957 $1,126 $1,334
Income Taxes $ 574 $ 278 $ 287
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In January, 1995 Wedgestone Automotive Corp, a subsidiary of Wedgestone
Financial acquired substantially all of the assets of Hercules Bumpers, Inc.
("Hercules") which manufactures and distributes rear bumpers for both domestic
and foreign light duty trucks. The purchase price for the assets acquired was
the assumption of certain debt and other liabilities
27
<PAGE>
approximating $5.1 million. In addition, certain debt is being guaranteed
jointly and severally by Charles W. Brady ("Brady"), the 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 Sale of Subsidiary (Note 3).
In connection with the Hercules acquisition, Resource Holdings Associates
and PFG received a fee of $220,000 consisting of $160,000 and 200,000 shares of
beneficial interest of Wedgestone at a valuation price of $.30 per share.
In connection with the January, 1995 acquisition of Hercules, Wedgestone
assumed liabilities to acquire assets as follows:
Accrued expenses $1,094,201
Revolver and other debt 3,957,024
----------
Total liabilities assumed $5,051,225
----------
----------
Receivables, inventories and other assets $2,990,855
Property, Plant and Equipment 2,060,370
----------
Total assets acquired $5,051,225
----------
----------
In connection with the April, 1996 sale of Hercules, $5,088,000 of assets
were sold and liabilities of $4,793,000 were assumed by the buyer.
28
<PAGE>
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the trustees,
executive officers and other management personnel of Wedgestone and its
subsidiaries as of February 19,1998:
Name Age Position
---- --- --------
Jeffrey S. Goldstein 51 Trustee - Wedgestone Financial
John C. Shaw 43 Chairman of the Board, Trustee -
Wedgestone Financial
Jeffrey A. Oberg 43 Trustee - Wedgestone Financial
John J. Doran 48 Trustee - Wedgestone Financial
David L. Sharp 46 President - Wedgestone Financial
Eric H. Lee 43 Chief Financial Officer, Treasurer /
Secretary - Wedgestone Financial
JEFFREY S. GOLDSTEIN served as President of Wedgestone from October 1,
1992 through July 5, 1997, and has continually served as a Trustee since June
16, 1992. Additionally, Mr. Goldstein has served as President of Rockaway 605
Corp. since 1989 and MBC Corp. as of 1996. Mr. Goldstein joined Rockaway 605
Corp. for the purpose of reorganizing Rockaway and he joined MBC for the purpose
of assisting in its liquidation of Hercules, formally owned by Wedgestone. Mr.
Goldstein also performed consulting services for Air Wisconsin Airlines Corp.
From 1985 to 1989, Mr. Goldstein served as Executive Vice President and
Treasurer of Kane Industries. From 1979 to 1985, Mr. Goldstein served as Vice
President and Treasurer of Arkay Packaging Corp.
JOHN C. SHAW has served as Chairman of the Board and as a Trustee since
November, 1992. Mr. Shaw has served as a Managing Director of Resource Holdings
Ltd., a New York based private merchant banking firm, since 1983. Mr. Shaw is
a member of the Board of Directors of National Capital Management Corp., a
publicly traded corporation with specialty finance, real estate and industrial
operations.
JEFFREY A. OBERG has served as a Trustee since October 1994. Mr. Oberg is
currently a manager with the investment bank of Furman Selz. Up to 1997, Mr.
Oberg had served as a Managing Director of KPMG Peat Marwick since August 1995.
Mr. Oberg previously served as Senior Vice President Finance and Corporate
Development at United States Banknote Corporation from January 1994 through July
1995, and as Vice President Finance and Corporate Development from February 1991
through December 1993. Prior to February 1991, Mr. Oberg served as Vice
President in the Investment Banking Division at The First Boston Corporation.
JOHN J. DORAN has served as a Trustee since October 1994. For the past ten
years, Mr. Doran served as President of Citizens Medical Corporation and as a
consultant to Medco Containment Services, Inc. Mr. Doran is a member of the
Board of Directors of Sandwich CoOp. Bank, a publicly traded company.
DAVID L. SHARP has served as President of Wedgestone Financial since
July 5, 1997 and as Chief Executive Officer of Wedgestone Automotive Corp
since the acquisition of the Automotive Segment from Standun on November 18,
1994. Mr. Sharp has been with the Standun companies since 1979, where he has
served in various positions with Standun's subsidiaries and divisions. From
1989 until the acquisition, Mr. Sharp served as President of Standun and the
Fey Automotive Products Division.
ERIC H. LEE has served as Chief Financial Officer, Treasurer and Secretary
of Wedgestone Financial as of July 5, 1997 and as Chief Financial Officer,
Treasurer and Secretary of Wedgestone Automotive Corp since the acquisition of
the Automotive Segment from Standun on November 18, 1994. From January 1994
until the acquisition, Mr. Lee served as Chief Financial Officer of Standun and
as Controller of the Fey Automotive Products division from February 23, 1993
until January 1994. Prior to Mr. Lee's employment at Standun, he occupied
various management positions within the electronics industry, and from 1991 to
1993 served as President and Chief Operating Officer of Synthane Taylor, a
subsidiary of Alco Industries.
29
<PAGE>
Mr. Shaw, as Chairman, Mr. Sharp as President and Mr. Lee as Chief
Financial Officer, Treasurer and Secretary, serve at the pleasure of the Board
of Trustees and each of the Trustees serve until their successors are elected
and qualified at the next annual meeting of Wedgestone's shareholders.
Wedgestone's Audit Committee is comprised of John J. Doran and Jeffrey A.
Oberg. Wedgestone's Compensation Committee is comprised of John J. Doran,
Jeffrey A. Oberg and John C. Shaw. Wedgestone's Executive Committee, is
comprised of John C. Shaw and Jeffrey S. Goldstein. These individuals will hold
their respective positions until the appointment of their respective successors.
All trustees are reimbursed for their reasonable out-of-pocket expenses
incurred in connection with attendance at Board meetings. Wedgestone
compensates its trustees who are not officers of the Company at a rate of $2,000
per quarter and $200 per meeting. There are no family relationships among any
of the executive officers or trustees of Wedgestone.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires Wedgestone's
officers and directors and persons who own more than ten percent of a registered
class of Wedgestone's equities securities, to file reports of ownership on Form
3 and changes in ownership on Forms 4 or 5 with the Securities and Exchange
Commission (the "Commission") and the NASDAQ System. Such officers, directors
and ten percent shareholders are also required by the Commission's rules to
furnish Wedgestone with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representation from certain reporting persons that no Form 5 was
required for such persons, Wedgestone believes that during the year ended
December 31, 1995, all Section 16(a) filing requirements applicable to its
officers, directors and ten percent shareholders were complied with.
ITEM 11. EXECUTIVE COMPENSATION
The three components of the Company's executive officer compensation
program are base salary, annual incentive compensation in the form of a cash
bonus and long-term incentive compensation in the form of stock options.
Executive officers are also entitled to various benefits including participation
in the Company's medical, life insurance and long-term disability plans which
are generally available to employees of the Company. The Compensation Committee
of the Board of Trustees consisting of two outside trustees and the Company's
Chairman, is responsible for the evaluation and approval of the compensation of
Wedgestone Financial officers.
The following tabulation gives information with respect to remuneration
paid to each of the three highest paid executive officers of Wedgestone and its
subsidiaries for the years ended December 31, 1997, 1996, and 1995.
SUMMARY COMPENSATION
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------------- ------------
Year Salary Bonus Benefits Options
---- ------ ----- -------- --------
<S> <C> <C> <C> <C> <C>
Jeffrey S. Goldstein, President 1997 $108,500 $ -0- $ -0- 85,000
Wedgestone Financial (through July 5, 1997) 1996 175,000 -0- -0- -0-
1995 160,200 -0- -0- -0-
David L. Sharp, President 1997 153,200 80,100 7,200 251,600
Wedgestone Financial 1996 126,200 25,000 6,000 -0-
1995 114,750 34,000 8,712 -0-
Eric H. Lee, Chief Financial Officer 1997 112,500 57,100 7,200 160,000
Wedgestone Financial 1996 99,000 25,000 6,000 -0-
1995 95,000 26,000 8,678 -0-
</TABLE>
The following table shows, for those individuals named in the Summary
Compensation table, information concerning stock options granted during the year
ended December 31, 1997.
30
<PAGE>
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
Options % of Total Exercise Expiration Potential Realizable Value(2)
Granted(1) Granted in 1997 Price Date(1) 5% 10%
---------- --------------- ----- ------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Jeffrey S. Goldstein 85,000 10.4% .31 9/22/02 25,489 31,437
David L. Sharp 251,600 30.9% .31 9/22/02 75,450 93,055
Eric H. Lee 160,000 19.7% .31 9/22/02 48,000 59,200
</TABLE>
- ------------------------------
(1) Options indicated were immediately vested at date of grant and become
exercisable over a five year period ending September 22, 2002.
(2) Potential Realizable Value at assumed Annual Rates of Stock Price
Appreciation for Option terms at rates of 5% and 10% is information mandated by
the Securities and Exchange Commission and does not represent the Company's
estimate or projection of the future price of its shares of Beneficial Interest.
No executive officer exercised options during 1997. The following table sets
forth, for each of the executive officers named in the Summary Compensation
Table, the year-end value of unexercised options.
AGGREGATED OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-The-Money Options
At Year-End At-Year-End
----------- -----------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jeffrey S. Goldstein 85,000 -0- $ 56,950 0
David L. Sharp 251,600 -0- $168,572 0
Eric H. Lee 160,000 -0- $107,200 0
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, the Compensation Committee of the Board of Trustees of the
Company was comprised of John J. Doran, Jeffrey A. Oberg and John C. Shaw. None
of the members of the Compensation Committee has ever been an employee or
officer of the Company or any of its subsidiaries, with the exception of Mr.
Shaw who is the Chairman of the Board but does not receive compensation for
acting in such capacity. Mr. Shaw, however, is a significant equity holder in
PSG Associates and Resource Holdings Associates, each of which respectively
provide financial and advisory services to St. James and Fey, subsidiaries of
the Company. In 1997 the Company paid PSG Associates $125,000 in connection
with such services to St. James and $60,000 and $120,000 to PFG and Resource
Holdings Associates, respectively for such services rendered to Fey. The Company
will pay PSG Associates $125,000 for financial and advisory services rendered to
St. James for the current year and $60,000 and $120,000 to PFG and Resource
Holdings Associates, respectively for such services rendered to Fey. Otherwise,
none of the members of the Compensation Committee has any relationship requiring
disclosure under any paragraph of Item 404 or in Item 402(j)(3) of Regulation
S-K promulgated by the Commission.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF TRUSTEES
The following is the report of the Compensation Committee of the Company
(the "Committee") on executive compensation for fiscal 1997.
COMPENSATION PHILOSOPHY. The Committee believes that it is in the best
interests of the shareholders for the Company to attract, maintain and motivate
top quality management personnel, especially its executive officers, by offering
and maintaining a competitive compensation package that exhibits an appropriate
relationship between executive pay and the creation of stockholder value. The
general philosophy of the committee is to integrate (i) adequate levels of
annual base compensation; (ii) annual cash bonuses and equity awards based on
achievement of short-term corporate and individual performance goals, such that
executive compensation levels will be higher in years in which performance goals
are achieved or exceeded; and (iii) equity awards, to ensure that management has
a continuing stake in the long term success of the Company and return of value
to its stockholders.
31
<PAGE>
The elements of the Committee's integrated compensation philosophy and the
application of these philosophies during 1996 are summarized as follows:
BASE COMPENSATION LEVELS. Although the Committee believes that
performance-based pay elements should be a key element in the compensation
packages for its executive officers, the Company must maintain base compensation
levels commensurate with other comparable companies in its industry with whom
the Company competes for management personnel (the "Comparable Companies").
The Comparable Companies selected by the Company are those automotive
supply companies that have production and marketing strategies similar to those
of the Company, which are similar to the Company and which compete for
executives in the same markets as the Company.
Although the process of setting base compensation levels often reflects
subjective factors, such as leadership, commitment, attitude and motivational
effect, the Committee also considers objective factors, such as achievement
of performance goals (primarily profitability of the areas over which the
executive has management responsibility), level of responsibility and prior
experience. The Committee believes that the overall compensation paid to the
Company's executive officers for the last year was competitive with overall
compensation paid by the Comparable Companies for similar positions.
PERFORMANCE-BASED COMPENSATION. The Company provides executive officers
with the following performance-based compensation programs:
- CASH BONUSES. Cash bonuses may be earned if certain specified
performance goals are achieved.
- STOCK OPTIONS. Options may be granted pursuant to the Wedgestone
Financial 1996 Stock Option Plan (the "Option Plan") at an exercise
price equal to or greater than the fair market value of the stock on
the date of the grant. The value of the options is related directly
to the market price of the stock and, accordingly to the long-term
performance of the Company. An aggregate of 812,800 options were
granted to the Company's executive officers in 1997 under the Option
Plan. The number of options granted was based on the executive's
length of service and level of responsibility in the Company.
COMPENSATION OF PRESIDENT. Mr. Sharp's base compensation for 1997 was
$153,200. As of February 19, 1998 the Committee has not established a base
compensation for Mr. Sharp for 1998. The Committee believes that Mr. Sharp's
base salary in 1997 was comparable to that of other Presidents in the industry
in which the Company competes. Mr. Sharp received an $80,100 bonus in 1997.
COMPENSATION OF CHIEF FINANCIAL OFFICER. Mr. Lee's base compensation for
1997 was $112,500. As of February 19, 1998 the Committee has not established a
base compensation for Mr. Lee for 1998. The Committee believes that Mr. Lee's
base salary in 1997 was comparable to that of other Chief Financial Officers in
the industry in which the Company competes. Mr. Lee received a $57,100 bonus in
1997.
John J. Doran, Chairman
Jeffrey A. Oberg
John C. Shaw
Members of the Compensation Committee
32
<PAGE>
PROFIT SHARING, STOCK OPTION PLANS AND WARRANTS
During 1996 Wedgestone created the Wedgestone Financial 1996 Stock Option
Plan (the "Option Plan"). The Option Plan carries an effective date of
December 31, 1996. The total number of shares of Wedgestone stock reserved and
available for distribution under the Option Plan is 1,000,000. Officers, other
key employees and significant non-employees who are responsible for or
contribute to the management, growth and/or profitability of the business of
Wedgestone are eligible to be granted stock options under the Option Plan. The
Option Plan replaces and supersedes a former stock option plan established in
1995. The optionees under the Option Plan will be selected from time to time by
the Committee (a group of not less than three persons appointed by the
Trustees). The stock options granted under the Option Plan may be of two types:
(i) Incentive Stock Options and (ii) Non-Qualified Stock Options. The option
price per share of stock under a stock option will be determined by the
Committee at the time of grant. The option price with respect to an incentive
stock option shall not be less than 100% of the fair market value of the
Wedgestone stock on the date of the option grant. The option price with respect
to a non-qualified stock option shall not be less than 85% of the fair market
value of the Wedgestone stock on the date of the option grant. The stock
options can be exercised at such times as determined by the Committee. The
stock which is acquired through the exercise of the stock option is required to
be held for investment and not for resale or other distribution. The options
and the stock are non-transferable. As of December 31, 1997, 812,800 options
have been granted.
In 1995 two outside directors, Mr. John J. Doran and Mr. Jeffrey A. Oberg,
were each granted 15,000 warrants to acquire shares of beneficial interest in
Wedgestone at an exercise price of $.25 per warrant share. The warrants may be
exercised at any time from the date of grant until October 31, 1998. The
warrants or the warrant shares may not be disposed of or encumbered, except in
accordance with certain provisions of the Securities Act. As of February 9,
1998, none of the warrants have been exercised.
All former Profit Sharing, Stock Option and 401(k) Profit Sharing Plans
were terminated pursuant to the bankruptcy plan of reorganization in 1992. The
401(k) Profit Sharing Plan was liquidated as of July 21, 1993 and the assets
were distributed to the plan participants. In January 1995, the Company
established the Wedgestone Automotive Corp Retirement Savings Plan (the
"Retirement Plan"). The Retirement Plan provides that all eligible employees of
the Company who have attained the age of 21, have completed one year of
employment and are not subject to a collective bargaining agreement are
permitted to contribute up to 15% of their salary to the Retirement Plan. The
Company makes contributions on behalf of each participant of a matching amount
up to an employee contribution of 2% of such employee's salary. Employees are
fully vested at all times with respect to all employee contributions to the
Retirement Plan.
On February 9, 1998 the Company announced a Tender Offer (the "Offer" or
"Tender Offer") to acquire all of the issued and outstanding shares of the
Company not owned by certain majority shareholders which include Stockwood LLC,
JCS Management Co. Inc., PFG Corporation, RAB Management Corp., and JMS Holdings
Co., Inc. whom collectively own 62.1% of the current issued and outstanding
shares. The Offer price is $ .67 net per share to sellers in cash. Shares not
tendered will be converted into the right to receive $ .67 per share in a merger
to be consummated as soon as practical after the Tender Offer. Under the
provisions of the Option Plan, option holders as of the date of the Tender
Offer, to the extent they are vested, will be included in the total shares to be
purchased. As of February 13, 1998, all such option holders are fully vested
and under the Option Plan, are granted the right to exercise their options in
conjunction with the Tender Offer in a cash-less based exercise transaction
whereby they would receive the Tender price per share less the exercise price
per share of $.31.
33
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows, as of December 31, 1997, certain information
known to Wedgestone regarding security holders of Wedgestone who may be deemed
to be the beneficial owners of 5% or more of each class of Wedgestone's shares.
<TABLE>
<CAPTION>
BENEFICIAL SHARES
-----------------------------------
Amount and Nature of Percent of
Name and Address of Beneficial Owners Beneficial Ownership Class
- ------------------------------------- -------------------- ----------
<S> <C> <C>
Stockwood LLC 6,795,223 30.2%
520 Madison Avenue, 40th Floor
New York, NY 10022
JCS Management Co., Inc. 8,492,422(1) 37.8%
520 Madison Avenue, 40th Floor
New York, NY 10022
PFG Corporation 1,713,865(2) 7.6%
235 Sunrise Boulevard
Palm Beach, FL 33480
RAB Management Corp. 1,697,199(3) 7.5%
520 Madison Avenue, 40th Floor
New York, NY 10022
JMS Holdings Co., Inc. 1,697,198(4) 7.5%
520 Madison Avenue, 40th Floor
New York, NY 10022
Charles Brady 1,300,000(5) 5.8%
1315 Peachtree Street N.E. Suite 300
Atlanta, GA 30309
</TABLE>
- -----------------------------------
(1) Mr. John C. Shaw is the president and sole shareholder of this company.
6,795,223 of these shares are held by Stockwood LLC. Mr. Shaw is the
general manager of Stockwood LLC.
(2) Mr. James J. Pinto is the president and sole shareholder of this company.
PFG owns 25% of Stockwood LLC.
(3) Mr Richard A. Bartlett is the president and sole shareholder of this
company.
(4) Mr. Jerry M. Seslowe is the president and sole shareholder of this
company.
(5) Includes 100,000 shares held by Chattahoochee Leasing Corporation, an
affiliate of Mr. Brady.
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows, as of December 31, 1997, based upon information
supplied by the Trustees and officers of Wedgestone and its Subsidiaries, the
amount and nature of ownership of Wedgestone shares of each Trustee of
Wedgestone and of all Trustees and officers as a group.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address of Beneficial Owners Beneficial Ownership Class
- ------------------------------------- -------------------- ----------
<S> <C> <C>
John C. Shaw 8,492,422 (1) 37.8%
Jeffrey A. Oberg 15,000 (2) *
John J Doran 15,000 (2) *
Jeffrey S. Goldstein 85,000 (3) *
David L. Sharp 251,600 (3) 1.0%
Eric H. Lee 160,000 (3) *
</TABLE>
- -----------------------------------
* Represents less than 1%
(1) See Footnote (1) under Security Ownership of Certain Beneficial Owners.
34
<PAGE>
(2) Represents a Warrant that is immediately exercisable to purchase 15,000
shares.
(3) Represents options that are immediately exercisable to purchase shares
indicated.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Automotive Segment was purchased from Standun, which is indirectly
owned and/or controlled by Resource Holdings Associates and PFG Corp. The
managing directors of Resource Holdings Ltd. (the general partner of Resource
Holdings Associates) and PFG Corp are former shareholders of St. James. Each of
the managing directors owns directly or indirectly in excess of 5% of the
outstanding shares of Wedgestone. Stockwood owns 31.0% of Wedgestone.
Wedgestone assumed a note associated with the termination of Standun's
management agreement with Fifth Avenue Partners, a related party of Wedgestone
in the amount of $1,104,086 in conjunction with the acquisition. The note is
payable monthly with interest calculated in arrears at 9% per annum over the
five years ending December 31, 1999. In 1997 Wedgestone paid $ 275,000 in
principal and interest on this loan.
St. James has a Consulting Agreement with PSG Associates entered into on
January 10, 1992 (prior to its acquisition by Wedgestone). Pursuant to this
Agreement, PSG Associates has agreed to provide advisory services to St. James
with respect to its operations, expansion and financing activities at a minimum
rate of $125,000 per year plus reimbursement of expenses. Mr. Shaw, a trustee
of the Company, is a significant equity holder in PSG Associates, through JCS
Holdings Corp. ("JCS") as is each of PFG Corp., JMS Holdings Corp., and RAB
Management Corp. (the former St. James shareholders). During 1997, 1996 and
1995, St. James paid $125,000 per year to PSG Associates under this contract.
For 1998, St. James is required to pay to PSG Associates $125,000 annually,
pursuant to this Agreement.
Effective January 1, 1996, Fey Automotive Products, Inc. entered into a
four-year agreement with PFG and Resource Holdings Associates to provide
advisory services to Fey with respect to its operations, expansion and financing
activities at an aggregate amount of $180,000.
On January 12, 1993, as amended, Wedgestone entered into a secured, one
year credit facility due July 1996 with Rockaway pursuant to which Wedgestone
was permitted to borrow up to a maximum to $300,000 with additional over
advances available at the discretion of the lender to fund Wedgestone's
working capital needs and those of its subsidiaries. The contractual rate of
interest on this facility was fifteen percent (15%) per annum and there was a
commitment fee of $4,500, payable upon initial funding and an extension fee
of $5,000 in connection with the amendment in 1994. The Rockaway Loan was
secured by a pledge of substantially all of the stock of Wedgestone's
subsidiaries, its personal assets and notes receivables. As of December 31,
1995, Wedgestone had borrowed $300,000 pursuant to this facility and Rockaway
advanced amounts in excess of the agreement of $429,000. In 1996, the Company
paid $ 717,800 in principal and interest on this credit facility. Rockaway is
a real estate holding company which is controlled by former St. James
shareholders. The former St. James shareholders are entitled to
substantially all of the economic benefits of Rockaway. Mr. Goldstein, who
was the former president and a trustee of Wedgestone, the president of
Rockaway. This credit facility was repaid in 1996.
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.
35
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 10-K
(a) Set forth below are consolidated financial statements, financial
statement schedules and exhibits filed as part of this Annual Report on Form
10-K.
1. Consolidated Financial Statements
Reference is made to the index of consolidated financial statements
and supplementary data on page 13.
2. Financial Statement Schedules
Schedule II, Valuation and Qualifying Accounts, Schedule III, Real
Estate and Accumulated Depreciation and Schedule IV, Mortgage Loans on
Real Estate appear on pages 41 through 43 hereof. All other schedules
are not included because they are not applicable.
3. Exhibits
The following Exhibits are filed as part of, or incorporated by
reference into this report:
Exhibit No.
-----------
(2) (i) The Merger Agreement with St. James Automotive Corp.
into a subsidiary of Wedgestone as contemplated in
Wedgestone's Plan of Reorganization dated May 29, 1992
(Filed as Exhibit 2 to Form 8-K filed June 15, 1992 and
incorporated herein by reference).
(ii) The Asset Sale Agreement between Wedgestone Financial,
Wedgestone Automotive Corp., Fey Automotive Products,
Inc. and Standun, Inc. dated October 28, 1994 (Filed as
Exhibit 1 to Form 8-K filed October 28, 1994 and
incorporated herein by reference).
(iii) First Amendment to Asset Sale Agreement between Fey
Automotive Products, Inc. and Standun, Inc. dated
November 17, 1994 (Filed as Exhibit 2 to Form 8-K filed
December 1, 1994 and incorporated herein by reference).
(iv) Asset Sale Agreement between Hercules Automotive
Products, Inc. (a subsidiary of Wedgestone Financial)
and Hercules Bumpers, Inc. dated December 23, 1994
(Filed as Exhibit 1 to Form 8-K filed January 23, 1995
and incorporated herein by reference).
(v) Letter Amendment to Asset Sale Agreement between
Hercules Automotive Products, Inc. and Hercules
Bumpers, Inc. dated December 23, 1994 (Filed as Exhibit
2 to Form 8-K filed January 23, 1995 and incorporated
herein by reference).
(3) (i) Amendment and Restatement of Declaration of Trust and
Appointment of Trustees and Acceptance of Appointment
of Trustees dated June 15, 1992 (Filed as Exhibit 3 to
Form 8-K on June 26, 1992 and incorporated herein by
reference).
(4) (i) Specimen certificate for shares of beneficial interest,
$1.00 par value (Filed as Exhibit 1 to Form S-11
Registration Statement No. 2-66921 and incorporated
herein by reference).
(ii) Specimen certificate for Special Income Shares (Filed
as Exhibit 4(b) to Form S-14 Registration Statement No.
2-98006 and incorporated herein by reference).
(10) (i) Letter of Intent between Wedgestone Financial and PSG
Holdings Corp., d/b/a St. James Automotive (Filed as
Exhibit C to First Amended of Reorganization which was
filed as Exhibit 2(ii) to Form 8-K filed February 12,
1992 and incorporated herein by reference).
36
<PAGE>
(ii) Term note for $1,000,000 from Genesis Plastics, Inc.,
to Wedgestone Financial (Filed as an exhibit to Form
8-K Report dated August 24, 1992 and incorporated
herein by reference).
(iii) Loan and Security Agreement dated August 24, 1992
between Genesis Plastics, Inc., and Wedgestone
Financial for loan (Filed as an exhibit to Form 8-K
Report dated August 24, 1992 and incorporated herein by
reference).
(iv) Unconditional Secured Guaranty dated August 24, 1992
between Nicon Holdings, Inc., and Wedgestone Financial
for loan (Filed as an exhibit to Form 8-K Report dated
August 24, 1992 and incorporated herein by reference).
(v) Unconditional Guaranty dated August 24, 1992 between
Nicon Holdings, Inc., and Wedgestone Financial for loan
(Filed as an exhibit to Form 8-K Report dated August
24, 1992 and incorporated herein by reference).
(vi) Stock Exchange Agreement and Plan of Reorganization
dated August 24, 1992 between Nicon Plastics, Inc., and
Wedgestone Financial (Filed as an exhibit to Form 8-K
Report dated August 24, 1992 and incorporated herein by
reference).
(vii) Loan Participation and Sharing Agreement dated December
17, 1992 between Wedgestone Financial and JCS Holdings
Corp., RAB Management Corp., JMS Holdings Corp., and
PFG Corp. (Filed as an exhibit to Form 10-K filed March
31, 1993 and incorporated herein by reference).
(viii) Loan and Security Agreement dated January 12, 1993
between Wedgestone Financial and Rockaway 605 Corp.
(Filed as an exhibit to Form 10-K filed March 31, 1993
and incorporated herein by reference).
(ix) Amendment dated January 15, 1994 of Loan Participation
and Security Agreement dated January 12, 1993 between
Wedgestone Financial and Rockaway 605 Corp. (Filed as
an exhibit to Form 10-K filed April 13, 1994 and
incorporated herein by reference).
(x) Court approved motion by IRP releasing guarantee of
indebtedness owed to Charles Sullivan in exchange for
the right to purchase Wedgestone's one acre parcel and
IRP's assignment of it's 50% interest in Wedgestone's
New York property to Wedgestone. (Filed as an exhibit
to Form 10-K filed April 13, 1994 and incorporated
herein by reference).
(xi) Amendment dated November 1, 1994 of Loan and Security
Agreement dated January 12, 1993 between Wedgestone
Financial and Rockaway 605 Corp. (Filed as an exhibit
to Form 10-K filed March 30, 1995 and incorporated
herein by reference).
(xii) Registration Rights Agreement between Standun, Inc. and
Wedgestone Financial dated November 18, 1994 (Filed as
Exhibit 3 to Form 8-K filed December 1, 1994 and
incorporated herein by reference).
(xiii) The Wedgestone Financial 1994 Stock Option Plan
effective September 24, 1994. (Filed as an exhibit to
Form 10-K filed March 30, 1995 and incorporated herein
by reference).
(xiv) Promissory Note between Standun, Inc. and 5th Avenue
Partners dated November 17, 1994 and Assignment
Agreement, assigning the note to Fey Automotive
Products, Inc. (Filed as an exhibit to Form 10-K filed
March 30, 1995 and incorporated herein by reference).
(xv) Revolving Credit Line between Fey Automotive Products,
Inc., Sigma Plating Co., Inc. and St. James Automotive
Corp. and The CIT Group, Inc. dated November 18,
1994.(Filed as an exhibit to Form 10-K filed March 30,
1995 and incorporated herein by reference).
(xvi) Credit Enhancement Agreement of Charles Brady,
Chattahoochee Leasing Corporation and Wedgestone
Financial dated January 8, 1995 (Filed as Exhibit 3 to
Form 8-K filed January 23, 1995 and incorporated herein
by reference).
37
<PAGE>
(xvii) Promissory Note between Charles W. Brady and Hercules
Automotive Products, Inc. dated January 8, 1995 (Filed
as Exhibit 4 to Form 8-K filed January 23, 1995 and
incorporated herein by reference).
(xviii) Promissory Note between Chattahoochee Leasing
Corporation and Hercules Automotive Products, Inc.
dated January 8, 1995 (Filed as Exhibit 5 to Form 8-K
filed January 23, 1995 and incorporated herein by
reference).
(xix) The Wedgestone Financial 1996 Stock Option Plan
effective December 31, 1996 (Filed herewith).
(xx) The Management Agreement between Fey Automotive
Products, Inc. and PFG Corp. effective January 1,
1996 (Filed herewith).
(xxi) The Management Agreement between Fey Automotive
Products, Inc. and Resource Holdings Associates
effective January 1, 1996 (Filed herewith).
(21) Subsidiaries of Registrant:
Wedgestone College Point Corp., a New York corporation
Bristol Village Inc., a Connecticut corporation
MWF Corp., a Delaware corporation
LIP Corp., a Massachusetts corporation
St. James Automotive, a Delaware corporation
Wedgestone Automotive Corp., a Delaware corporation
Fey Automotive Products, Inc., a Delaware corporation
Sigma Plating Co., Inc., a California corporation
Note: Wedgestone Financial has seven consolidated wholly
owned subsidiaries operating in the United States.
Wedgestone College Point Corp., Bristol Village Inc.,
MWF Corp., and LIP Corp. own real estate acquired from
a borrower. See Schedule III to this report for a
description of the real estate so acquired. St. James
Automotive Corp., Wedgestone Automotive Corp., and Fey
Automotive Products, Inc., manufacture light duty truck
aftermarket accessories. Sigma Plating Co., Inc.
operates an electroplating facility.
(27) (a) Financial Data Schedule (Filed herewith).
(b) Reports on Form 8-K
(1) Form 8-K: Management Changes, issued on July 6,
1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WEDGESTONE FINANCIAL
Date: February 19, 1998 By: /s/ Eric H. Lee
-----------------------
Chief Financial Officer
38
<PAGE>
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Date: February 19, 1998 By: /s/ John C. Shaw
-----------------------
Trustee
Date: February 19, 1998 By: /s/ Jeffrey A. Oberg
-----------------------
Trustee
Date: February 19, 1998 By:/s/ John J. Doran
-----------------------
Trustee
Date: February 19, 1998 By:/s/ Jeffrey Goldstein
-----------------------
Trustee
The name "Wedgestone Financial" (formally 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 Wedgestone property
for the enforcement of any claims against Wedgestone Financial and that neither
The Trustees, officers, employees, agents nor shareholders assume any personal
liability for claims against Wedgestone or obligations entered into on behalf of
Wedgestone Financial, and that the respective properties shall not be subject to
claims of any other person in respect of any such liability.
39
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS: (Amounts in Thousands)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
Balance Charged Charged Balance
at beginning to costs & to other at end
Description Year of the Year expenses accounts Deductions of the year
----------- ---- ----------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Allowance for
Doubtful Accounts 1995 202 21 272(4) (239)(1) 256
1996 256 190 (60)(4) (53)(1) 333
1997 333 85 (74)(1) 344
Inventory Reserve 1995 283 (16) 230(4) (22)(2) 368
(107)(3)
1996 368 24 (231)(4) (42)(2) 119
1997 119 38 (25)(2) 132
</TABLE>
- ------------------------------
(1) Net Charge-off of bad debts
(2) Write off of obsolete inventory
(3) Physical inventory adjustment
(4) Assumed and subsequently disposed of in connection with the 1995 purchase
and 1996 sale of Hercules.
40
<PAGE>
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION: (Amounts in Thousands)
<TABLE>
<CAPTION>
Gross Amount at End of Period
Buildings & Date
Description Land Improvements Total Acquired
-------------------- ---------- -------------------- ---------- --------
<S> <C> <C> <C> <C>
LAND
Connecticut $ 128 $0 $ 128 10/88
RESIDENTIAL PROPERTIES
Northeastern Massachusetts 494 494 10/89
----- ---- -----
Total Real Estate $ 622 $0 $ 622
----- ---- -----
----- ---- -----
1997 1996 1995
------- ------- -------
Balance at beginning of period $1,086 $ 1,091 $ 965
Additions during the period:
Improvements/Carrying costs 5 --- 126
------- ------- -------
5 --- 126
------- ------- -------
1,091 1,091 1,091
Deductions during the period
Sales 915 --- ---
Write-off of real estate held 5
Depreciation
Legal Settlement
Transferred to IRP
------- ------- -------
915 --- ---
------- ------- -------
Balance at end of year $ 176 $ 1,086 $ 1,091
------- ------- -------
------- ------- -------
</TABLE>
See Note 7 to the Consolidated Financial Statements.
41
<PAGE>
SCHEDULE IV -- NOTES RECEIVABLE AND MORTGAGE LOANS ON REAL ESTATE: (Amounts in
Thousands)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
INTEREST FINAL PERIODIC FACE CARRYING LOANS SUBJECT
RATE AT MATURITY PAYMENT AMOUNT OF AMOUNT OF TO DELINQUENT
PROPERTY TYPE 12/31/96 DATE TERM MORTGAGES MORTGAGES PRIN/INTEREST
- ----------------------- -------- -------- -------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS
NONE 0 0 $0
--------- --------- -------------
</TABLE>
- ------------------------------
CHANGES IN NOTES RECEIVABLE, MORTGAGE LOANS AND LONG TERM NOTES:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of period $ 81 $ 84 $ 735
Additions during period
Increase to existing mortgage loans --- --- ---
------ ------ ------
--- --- ---
------ ------ ------
81 84 735
------ ------ ------
Deductions during period
Collections of principal 166 3 1
Cost of mortgages transferred to IRP
Reserve for loan loss (85) --- 650
------ ------ ------
81 3 651
------ ------ ------
Balance at end of year $ 0 $ 81 $ 84
------ ------ ------
------ ------ ------
</TABLE>
42
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000315621
<NAME> WEDGESTONE FINANCIAL
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 902
<SECURITIES> 0
<RECEIVABLES> 8,751
<ALLOWANCES> 344
<INVENTORY> 5,983
<CURRENT-ASSETS> 17,397
<PP&E> 12,318
<DEPRECIATION> 8,976
<TOTAL-ASSETS> 22,543
<CURRENT-LIABILITIES> 8,886
<BONDS> 0
0
0
<COMMON> 21,886
<OTHER-SE> (13,593)
<TOTAL-LIABILITY-AND-EQUITY> 22,543
<SALES> 52,387
<TOTAL-REVENUES> 52,387
<CGS> 34,128
<TOTAL-COSTS> 34,128
<OTHER-EXPENSES> 13,662
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 836
<INCOME-PRETAX> 3,761
<INCOME-TAX> 815
<INCOME-CONTINUING> 2,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,946
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
