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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 13E-4
(Amendment No. 1)
ISSUER TENDER OFFER TRANSACTION STATEMENT
(Pursuant to Section 13(e)(1) of the Securities Exchange Act of 1934)
WEDGESTONE FINANCIAL
(Name of the Issuer)
WEDGESTONE FINANCIAL
JCS MANAGEMENT CO., INC.
PFG CORP.
RAB MANAGEMENT CORP.
JMS HOLDINGS CO., INC.
STOCKWOOD LLC
(Name of Person(s) Filing Statement)
SHARES OF BENEFICIAL INTEREST, $1.00 PAR VALUE PER SHARE
(Title of Class of Securities)
948900 10 5
(CUSIP Number of Class of Securities)
David L. Sharp
President
Wedgestone Financial
5200 N. Irwindale Avenue, Suite 168
Irwindale, California 91706
818-338-3555
(Name, Address and Telephone Number of Persons Authorized to Receive Notices
and Communications Behalf of Person(s) Filing Statement)
WITH COPIES TO:
Kevin L. Crudden
Robins, Kaplan, Miller & Ciresi L.L.P.
2800 LaSalle Plaza
800 LaSalle Avenue
Minneapolis, Minnesota 55402
<PAGE>
February 9, 1998
(Date tender offer first published, sent or given to security holders)
Exhibit Index is located on Page 7.
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INTRODUCTION
This Rule 13e-4 Issuer Tender Offer Statement on Schedule 13E-4 (the
"Schedule 13E-4") is being filed by Wedgestone Financial, a Massachusetts
business trust (the "Company"), pursuant to Section 13(e) of the Securities
Exchange Act of 1934, as amended and Rule 13e-4 thereunder in connection with
the tender offer by the Company for all of its issued and outstanding shares of
beneficial interest, $1.00 par value (the "SBI") held by persons or entities
that own SBI (the "Public Shareholders") other than JCS Management Co., Inc.,
PFG Corp., RAB Management Corp., JMS Holdings Co., Inc., Stockwood LLC and
certain members of the Company's management (the "Remaining Shareholders") upon
the terms and subject to the conditions set forth in the Offer to Purchase dated
April __, 1998 (the "Offer to Purchase") and the related Letter of Transmittal
(which together with the Offer to Purchase constitute the "Offer"), copies of
which are filed as Exhibits (a)(1) and (a)(2) hereto respectively.
ITEM 1. SECURITY AND ISSUER.
(a) The name of the issuer of the securities that are the subject of the
tender offer is Wedgestone Financial, a Massachusetts business trust
with its principal executive offices at 5200 N. Irwindale Avenue,
Suite 168, Irwindale, California 91706.
(b) The class of equity securities being sought is all of the issued and
outstanding shares of beneficial interest, $1.00 par value per share
of the Company held by the Public Shareholders. The information set
forth under "Introduction," "Special Factors -- Interests of Certain
Persons in the Offer and the Merger" and "The Tender Offer --
Section 1. Terms of the Offer; Expiration Date" of the Offer to
Purchase is incorporated herein by reference.
(c) The information concerning the principal market in which the shares
of beneficial interest are traded and certain high and low sales
prices for the shares of beneficial interest in such principal market
is set forth in "The Tender Offer -- Section 6. Price Range of
Shares; Dividends" of the Offer to Purchase is incorporated herein by
reference.
(d) Not applicable.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) and (b) The information set forth under "The Tender Offer --
Section 8. Financing of the Offer and the Merger" of the
Offer to Purchase is incorporated herein by reference.
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ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE
ISSUER OR AFFILIATE.
(a)-(d) and (f)-(g) The information set forth under "Introduction,"
"Special Factors -- Purpose and Background of the
Offer; Certain Effects of the Offer; Plans of the
Company After the Offer" and "Special Factors --
Rights of Shareholders in the Event of Merger" of the
Offer to Purchase is incorporated herein by reference.
(e) The information set forth under "The Tender Offer -- Section 6.
Price Range of Shares; Dividends" and "The Tender Offer --
Section 8. Financing of the Offer and the Merger" of the Offer to
Purchase is incorporated herein by reference.
(h)-(j) The information set forth under "The Tender Offer -- Section 10.
Effect of the Offer on the Market for the Shares; Nasdaq Quotation
and Exchange Act Registration" of the Offer to Purchase is
incorporated herein by reference.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
No transactions in shares of beneficial interest have been effected during
the last 40 business days by the Issuer or by the persons referred to in
General Instruction C to this Schedule 13E-4.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO THE ISSUER'S SECURITIES.
The information set forth under "Special Factors -- Purpose and Background
of the Offer; Certain Effects of the Offer; Plans of the Company After the
Offer" of the Offer to Purchase describes the Clawback Agreement relating
to the commitment of the Company and the Remaining Shareholders to the
Public Shareholders with respect to a subsequent sale of the Company or a
change of control of the Company. In addition, "Special Considerations --
Beneficial Ownership of Beneficial Interest" and "Special Considerations --
Interest of Certain Persons in the Offer and Merger" is incorporated by
reference herein.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The information set forth under "Introduction," "Special Factors -- Opinion
of Commonwealth Associates," "Special Factors -- Fees and Expenses" and
"The Tender Offer -- Section 13. Fees and Expenses" of the Offer to
Purchase is incorporated herein by reference.
ITEM 7. FINANCIAL INFORMATION.
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(a) The information set forth under "The Tender Offer -- Section 7.
Certain Information Concerning the Company" of the Offer to Purchase
is incorporated herein by reference. In addition, the Company's
audited financial statements as of December 31, 1997 and
December 31, 1996 and for each of the three years in the period
ended December 31, 1997 are included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 which is attached
to the Offer to Purchase as Schedule III thereto and is incorporated
herein by reference.
(b) The information set forth under "The Tender Offer -- Section 7.
Certain Information Concerning the Company" is incorporated herein
by reference.
ITEM 8. ADDITIONAL INFORMATION.
(a) Not applicable.
(b) The information set forth under "The Tender Offer -- Section 12.
Certain Legal Matters and Regulatory Approvals" of the Offer to
Purchase is incorporated herein by reference.
(c) The information set forth under "The Tender Offer -- Section 10.
Effect of the Offer on the Market for the Shares; Nasdaq Quotation
and Exchange Act Registration" of the Offer to Purchase is
incorporated herein by reference.
(d) Not applicable.
(e) The information set forth in the Offer to Purchase and the Letter
of Transmittal, copies of which are attached hereto as Exhibits
(a)(1) and (a)(2), respectively, is incorporated herein by
reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a)(1) Form of the Offer to Purchase dated April __, 1998.
(a)(2) Form of the Letter of Transmittal.
(a)(3) Form of Notice of Guaranteed Delivery.
(a)(4) Form of Letter from Innisfree M&A Incorporated to Brokers, Dealers,
Commercial Banks, Trust Companies and Nominees to Clients.
(a)(5) Form of Letter from Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees to Clients.
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(a)(6) Form of Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
(a)(7) Press Release issued by the Company on February 9, 1998.
(b) Commitment Letter between the Company and The CIT Group/Credit
Finance, Inc. dated February 18, 1998.
(c)(1) Clawback Agreement between the Company and the Remaining
Shareholders dated February 9, 1998.
(c)(2) Restated and Amended Clawback Agreement between the Company and
the Remaining Shareholders dated April 15, 1998.
(d) None.
(e) Not applicable.
(f) None.
(g) Independent Auditor's Consent
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated: April 15, 1998
WEDGESTONE FINANCIAL
By: /s/ David L. Sharp
-----------------------
Name: David L. Sharp
Title: President
JCS MANAGEMENT CO., INC.
By: /s/ John C. Shaw
-------------------------
Name: John C. Shaw
Title: President
PFG CORP.
By: /s/ James J. Pinto
-------------------------
Name: James J. Pinto
Title: President
RAB MANAGEMENT CORP.
By: /s/ Richard A. Bartlett
-------------------------
Name: Richard A. Bartlett
Title: President
JMS HOLDINGS CO., INC.
By: /s/ Jerry M. Seslowe
-------------------------
Name: Jerry M. Seslowe
Title: President
STOCKWOOD LLC
By: /s/ John C. Shaw
-------------------------
Name: John C. Shaw
Title: Manager
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EXHIBIT INDEX
PAGE IN
SEQUENTIAL
NUMBERING
EXHIBIT NO. SYSTEM
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(b) Commitment Letter between the Company and The CIT Group/Credit Finance,
Inc. dated February 18, 1998 (1)
(a)(1) Form of the Offer to Purchase dated April __, 1998. . . . . . .
(a)(2) Form of the Letter of Transmittal (1)
(a)(3) Form of Notice of Guaranteed Delivery (1)
(a)(4) Form of Letter from Innisfree M&A Incorporated to Brokers, Dealers,
Commercial Banks, Trust Companies and Nominees to Clients (1)
(a)(5) Form of Letter from Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees to Clients (1)
(a)(6) Form of Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9 (1)
(a)(7) Press Release issued by the Company on February 9, 1998 (1)
(c)(1) Clawback Agreement between the Company and the Remaining
Shareholders dated February 9, 1998 (1)
(c)(2) Restated and Amended Clawback Agreement between the Company and
the Remaining Shareholders dated April 15, 1998 . . . . . . . . .
(g) Independent Auditor's Consent
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(1) previously filed
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<PAGE>
OFFER TO PURCHASE FOR CASH
Offer by
Wedgestone Financial to purchase for cash
its Outstanding Shares of Beneficial Interest, $1.00 par value,
at
$0.67 net per share
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
12:00 MIDNIGHT, EASTERN DAYLIGHT TIME, ON ____________, 1998
UNLESS THE OFFER IS EXTENDED.
Wedgestone Financial, a Massachusetts business trust (the "Company"),
hereby offers to purchase its issued and outstanding shares of beneficial
interest, $1.00 par value (the "SBI"), held by persons or entities that own SBI
(the "Public Shareholders") other than JCS Management Co., Inc., PFG Corp., RAB
Management Corp. and JMS Holdings Co., Inc. (collectively, the "Investors" and
together with Stockwood LLC and certain members of the Company's management, the
"Remaining Shareholders") at $0.67 per Share, net to the seller in cash, without
interest thereon, upon the terms and subject to the conditions set forth in this
Offer to Purchase (the "Offer to Purchase") and in the related Letter of
Transmittal, which together with this Offer to Purchase constitutes the "Offer."
The Offer is not conditioned upon any minimum number of SBI owned by the
Public Shareholders (the "Shares") being tendered. The Offer is, however,
subject to certain other conditions. See "The Tender Offer - Section 11.
Certain Conditions of the Offer."
THE BOARD OF TRUSTEES OF THE COMPANY, BY UNANIMOUS VOTE OF ALL TRUSTEES
PRESENT AND VOTING, BASED UPON, AMONG OTHER THINGS, THE UNANIMOUS RECOMMENDATION
AND APPROVAL OF THE TRUSTEES OF THE COMPANY WHO ARE NOT OFFICERS OF THE COMPANY
(THE "INDEPENDENT TRUSTEES"), HAS DETERMINED THAT THE OFFER IS FAIR TO, AND IN
THE BEST INTERESTS OF, THE PUBLIC SHAREHOLDERS, AND RECOMMENDS THAT THE PUBLIC
SHAREHOLDERS ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER.
The SBI are traded in the over-the-counter market and are quoted on the
OTC Bulletin Board Service ("OTCBB") of The Nasdaq Stock Market, Inc. under
the ticker symbol "WDGF." On February 6, 1998, the last trading day before
the Company announced the Offer, the last reported bid price was $0.35 per
share.
SHAREHOLDERS ARE URGED TO OBTAIN A CURRENT
MARKET QUOTATION FOR THE SHARES.
<PAGE>
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THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH TRANSACTION OR THE ACCURACY OR ADEQUACY
OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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THE INFORMATION AGENT FOR THE OFFER IS
INNISFREE M&A INCORPORATED.
April __ , 1998
IMPORTANT
ANY SHAREHOLDER DESIRING TO TENDER ALL OR ANY PORTION OF SUCH SHAREHOLDER'S
SHARES SHOULD EITHER (1) COMPLETE AND SIGN THE LETTER OF TRANSMITTAL (OR A
FACSIMILE THEREOF) IN ACCORDANCE WITH THE INSTRUCTIONS IN THE LETTER OF
TRANSMITTAL AND MAIL OR DELIVER IT AND ANY OTHER REQUIRED DOCUMENTS TO THE
DEPOSITARY AND EITHER DELIVER THE CERTIFICATE(S) EVIDENCING THE TENDERED SHARES
TO THE DEPOSITARY ALONG WITH THE LETTER OF TRANSMITTAL OR DELIVER SUCH SHARES
PURSUANT TO THE PROCEDURE FOR BOOK-ENTRY TRANSFER SET FORTH IN "THE TENDER OFFER
- -- SECTION 3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES" OR (2)
REQUEST SUCH SHAREHOLDER'S BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR
OTHER NOMINEE TO EFFECT THE TRANSACTION FOR SUCH SHAREHOLDER. ANY SHAREHOLDER
WHOSE SHARES ARE REGISTERED IN THE NAME OF A BROKER, DEALER, COMMERCIAL BANK,
TRUST COMPANY OR OTHER NOMINEE MUST CONTACT SUCH BROKER, DEALER, COMMERCIAL
BANK, TRUST COMPANY OR OTHER NOMINEE IF SUCH SHAREHOLDER DESIRES TO TENDER SUCH
SHARES.
ANY SHAREHOLDER WHO DESIRES TO TENDER SHARES AND WHOSE CERTIFICATES
EVIDENCING SUCH SHARES ARE NOT IMMEDIATELY AVAILABLE, OR WHO CANNOT COMPLY WITH
THE PROCEDURE FOR BOOK-ENTRY TRANSFER ON A TIMELY BASIS, MAY TENDER SUCH SHARES
BY FOLLOWING THE PROCEDURE FOR GUARANTEED DELIVERY SET FORTH IN "THE TENDER
OFFER -- SECTION 3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES."
QUESTIONS OR REQUESTS FOR ASSISTANCE MAY BE DIRECTED TO THE INFORMATION
AGENT AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ON THE BACK COVER OF THIS
OFFER TO PURCHASE. ADDITIONAL COPIES OF THIS OFFER TO PURCHASE, THE LETTER OF
TRANSMITTAL AND THE NOTICE OF GUARANTEED DELIVERY MAY ALSO BE OBTAINED FROM THE
INFORMATION AGENT OR FROM BROKERS, DEALERS, COMMERCIAL BANKS OR TRUST COMPANIES.
2
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SPECIAL FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1. Purpose and Background of the Offer; Certain Effects of the
Offer; Plans of the Company after the Offer. . . . . . . . . . . . . 3
2. Rights of Shareholders in the Event of Merger. . . . . . . . . . . . 8
3. Recommendation of the Company's Board; Fairness of the Offer . . . . 9
4. Opinion of Commonwealth Associates . . . . . . . . . . . . . . . . .11
5. Interests of Certain Persons in the Offer and the Merger . . . . . .13
6. Beneficial Ownership of SBI. . . . . . . . . . . . . . . . . . . . .14
7. Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . .15
THE TENDER OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
1. Terms of the Offer; Expiration Date. . . . . . . . . . . . . . . . .16
2. Acceptance for Payment and Payment for Shares. . . . . . . . . . . .17
3. Procedures for Accepting the Offer and Tendering Shares. . . . . . .18
4. Withdrawal Rights. . . . . . . . . . . . . . . . . . . . . . . . . .21
5. Certain Federal Income Tax Consequences. . . . . . . . . . . . . . .22
6. Price Range of Shares; Dividends . . . . . . . . . . . . . . . . . .22
7. Certain Information Concerning the Company . . . . . . . . . . . . .23
8. Financing of the Offer and the Merger. . . . . . . . . . . . . . . .29
9. Dividends and Distributions. . . . . . . . . . . . . . . . . . . . .29
10. Effect of the Offer on the Market for the Shares;
Quotation and Exchange Act Registration. . . . . . . . . . . . . . .30
11. Certain Conditions of the Offer. . . . . . . . . . . . . . . . . . .30
12. Certain Legal Matters and Regulatory Approvals . . . . . . . . . . .31
13. Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . .33
14. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . .33
SCHEDULE I - Directors and Executive Officers of the Company . . . . . . I-1
SCHEDULE II - Opinion of Commonwealth Associates. . . . . . . . . . . . . II-1
SCHEDULE III - Summary of Shareholder Appraisal Rights and Text of
Sections 85-98 of the Massachusetts Business Corporation
Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
SCHEDULE IV - Annual Report on Form 10-K of the Company for the
year ended December 31, 1997. . . . . . . . . . . . . . . . IV-1
</TABLE>
i
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To the Public Shareholders of Wedgestone Financial:
INTRODUCTION
Wedgestone Financial, a Massachusetts business trust (the "Company"),
hereby offers to purchase its issued and outstanding shares of beneficial
interest, $1.00 par value (the "SBI") held by persons or entities that own
the SBI (the "Public Shareholders") other than JCS Management Co., Inc., PFG
Corp., RAB Management Corp. and JMS Holdings Co., Inc. (collectively, the
"Investors" and together with Stockwood LLC and certain members of the
Company's management, the "Remaining Shareholders") at $0.67 per Share, net
to the seller in cash (the "Offer Price"), upon the terms and subject to the
conditions set forth in this Offer to Purchase (the "Offer to Purchase") and
in the related Letter of Transmittal, which together with this Offer to
Purchase constitutes the "Offer."
Tendering shareholders will not be obligated to pay brokerage fees or
commissions or, except as otherwise provided in Instruction 6 of the Letter
of Transmittal, stock transfer taxes with respect to the Company's purchase
of the SBI held by the Public Shareholders (the "Shares") pursuant to this
Offer. The Company will pay all charges and expenses of BankBoston, N.A.
(the "Depositary") and Innisfree M&A Incorporated (the "Information Agent")
incurred in connection with the Offer. See "Special Factors -- Fees and
Expenses" and "The Tender Offer -- Section 13. Fees and Expenses."
The Offer is not conditioned upon any minimum number of Shares being
tendered. The Offer is, however, subject to certain other conditions. See "The
Tender Offer -- Section 11. Certain Conditions of the Offer," which sets forth
in full the conditions of the Offer.
At December 31, 1997, there were (a) 21,885,668 SBI issued and outstanding,
(b) no SBI held in the treasury of the Company, (c) 814,300 SBI reserved for
future issuance to employees pursuant to outstanding employee stock options and
(d) 30,000 SBI reserved for future issuance pursuant to warrants. Prior to the
announcement of the Offer, there were approximately 3,000 holders of record of
the issued and outstanding SBI. Pursuant to the Offer, the Company seeks to
acquire approximately 8,246,484 SBI which are held by the Public Shareholders,
together with any SBI that may be acquired by employees upon the exercise of
employee stock options. The Remaining Shareholders, who own 13,639,184 SBI, or
approximately 62.3% of the outstanding SBI, have informed the Company that they
do not intend to tender any SBI owned by them pursuant to the Offer.
The purpose of the Offer is (i) to provide the Public Shareholders with
liquidity for their SBI by enabling them to sell their SBI at a fair price and
at a premium over recent market prices and (ii) to enable the Remaining
Shareholders to retain the entire equity interest in the Company. Following the
completion of the Offer, the Remaining Shareholders will acquire any remaining
equity interest in the Company not then owned by the Remaining Shareholders by
effecting the Merger described below.
If less than all of the Shares owned by the Public Shareholders are
tendered pursuant to the Offer, the Company will enter into a merger agreement
or other form of business combination with
1
<PAGE>
an entity to be formed, which will be wholly owned by the Remaining
Shareholders (the "Merger"). If necessary, the Company will seek shareholder
approval of the Merger in accordance with applicable laws. The Remaining
Shareholders, who currently own 62.3% of the outstanding SBI, intend to vote
all of their SBI in favor of the Merger if a shareholder vote is required.
Accordingly, if at least 1,423,142 Shares are tendered pursuant to the Offer,
the Remaining Shareholders will own more than 66 2/3% of the outstanding SBI
and approval of the Merger will be assured. It is contemplated that the
consideration payable to the Public Shareholders in the Merger will be cash
in an amount equal to the Offer Price. After the Merger, there will be no
Public Shareholders of the Company, the SBI will not be listed for quotation
by on the OTCBB, and the registration of the SBI under the Securities
Exchange Act of 1934 (the "Exchange Act") will be terminated. The net result
of the Offer and the Merger will be that the Company will become a private
company, the shares of which will be owned 100% by the Remaining
Shareholders. See "The Tender Offer -- Section 10. Effect of the Offer on
the Market for the Shares, on the OTCBB Quotation and Exchange Act
Registration."
The Offer is intended to afford shareholders the opportunity to sell
their SBI in light of the current relative illiquidity of the Shares.
Management believes that the public trading market for the SBI has been and
will continue to be characterized by low prices and low trading volumes. As a
result there is a limited market for the SBI. Low trading volumes make it
difficult for shareholders to sell large blocks of SBI. Low prices mean
shareholders who wish to sell a small number of SBI will receive only a
nominal return after payment of commissions.
The Independent Committee has received the written opinion of
Commonwealth Associates ("Commonwealth Associates") that a cash consideration
of $0.65 net per share to the Public Shareholders is fair to such
shareholders from a financial point of view. See "Special Factors -- Opinion
of Commonwealth Associates" for further information concerning the opinion of
Commonwealth Associates.
THE BOARD OF TRUSTEES OF THE COMPANY (THE "BOARD"), BY UNANIMOUS VOTE OF
ALL TRUSTEES PRESENT AND VOTING, BASED UPON, AMONG OTHER THINGS, THE UNANIMOUS
RECOMMENDATION AND APPROVAL OF THE TRUSTEES OF THE COMPANY WHO ARE NOT OFFICERS
OF THE COMPANY (THE "INDEPENDENT TRUSTEES"), HAS DETERMINED THAT THE OFFER IS
FAIR TO, AND IN THE BEST INTERESTS OF, THE PUBLIC SHAREHOLDERS, AND RECOMMENDS
THAT THE PUBLIC SHAREHOLDERS ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT
TO THE OFFER.
The Company has filed with the Securities and Exchange Commission (the
"Commission") an Issuer Tender Offer Statement on Schedule 13E-4 (the
"Schedule 13E-4").
The SBI are traded in the over-the-counter market and are quoted on the
OTC Bulletin Board Service ("OTCBB") of The Nasdaq Stock Market, Inc. under
the ticker symbol "WDGF." On February 6, 1998, the last trading day before
the Company announced the Offer, the last reported bid price was $0.35 per
share.
SHAREHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE
SHARES.
2
<PAGE>
The Company 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 (the "Bankruptcy
Proceeding"). After filing the Bankruptcy Proceeding, the Company approached
the Investors to obtain their participation in a reorganization plan. The
reorganization plan as developed provided for the Investors to receive
approximately a 47% interest in the Company in exchange for a 100% interest
in St. James Automotive Corp. ("St. James"), a manufacturer of automotive
accessories for the light duty truck market which was wholly owned indirectly
by the Investors. Wedgestone's resultant plan of reorganization (the "Plan")
was confirmed by the Bankruptcy Court on May 5, 1992. The Plan became
effective on August 3, 1992.
In November 1994, the Company acquired the automotive business segment of
Standun, Inc. ("Standun"), a corporation owned by the Investors. This business
consisted of Fey Automotive Products, Inc. and Sigma Plating Co., Inc. In
connection with this transaction, Standun received, among other things,
6,795,223 SBI, which were subsequently sold to Stockwood LLC, an entity owned by
the Investors.
This Offer to Purchase and the accompanying documents contain information
required to be disclosed by the Exchange Act and the rules and regulations
promulgated thereunder, including financial information regarding the Company, a
description of the terms, conditions and background of the Offer, and the
procedures for tendering Shares for purchase.
THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN
IMPORTANT INFORMATION THAT SHOULD BE READ BEFORE ANY DECISION IS MADE WITH
RESPECT TO THE OFFER.
SPECIAL FACTORS
1. PURPOSE AND BACKGROUND OF THE OFFER; CERTAIN EFFECTS OF THE OFFER;
PLANS OF THE COMPANY AFTER THE OFFER.
The purpose of the Offer is (i) to provide the Public Shareholders with
liquidity for their SBI by enabling them to sell their SBI at a fair price and
at a premium over recent market prices and (ii) to enable the Remaining
Shareholders to retain the entire equity interest in the Company. Following the
completion of the Offer, the Remaining Shareholders will acquire any remaining
equity interest in the Company not then owned by the Remaining Shareholders by
effecting the Merger described below.
If less than all of the Shares owned by the Public Shareholders are
tendered pursuant to the Offer, the Company intends to enter into a merger
agreement or other form of business combination with an entity to be formed,
which will be wholly owned by the Remaining Shareholders. If necessary, the
Company will seek shareholder approval of the Merger in accordance with
applicable laws. The Remaining Shareholders, who currently own 62.3% of the
outstanding SBI, intend to vote all of their SBI in favor of the Merger if a
shareholder vote is required. Accordingly, if at least
3
<PAGE>
1,423,142 Shares are tendered pursuant to the Offer, the Remaining
Shareholders will own more than 66 2/3% of the outstanding SBI and approval
of the Merger will be assured. It is contemplated that the consideration
payable to the Public Shareholders in the Merger will be cash in an amount
equal to the Offer Price. After the Merger, there will be no Public
Shareholders of the Company, the SBI will not be listed for quotation on the
OTCBB, and the registration of the SBI under the Securities Exchange Act of
1934 (the "Exchange Act") will be terminated. The net result of the Offer
and the Merger will be that the Company will become a private company, the
shares of which will be owned by 100% of the Remaining Shareholders. See
"The Tender Offer -- Section 10. Effect of the Offer on the Market for the
Shares, Quotation and Exchange Act Registration."
The Offer is intended to afford shareholders the opportunity to sell their
SBI in light of the current relative illiquidity of the Shares. Management
believes that the public trading market for the SBI has been and will continue
to be characterized by low prices and low trading volumes. As a result there is
a limited market for the SBI. Low trading volumes make it difficult for
shareholders to sell large blocks of SBI. Low prices mean shareholders who wish
to sell a small number of SBI will receive only a nominal return after payment
of commissions
Consummation of the Offer and the Merger will permit the Remaining
Shareholders to receive all of the benefits that result from ownership of the
entire equity interest in the Company. Such benefits include management and
investment discretion with regard to the future conduct of the business of the
Company, the benefits of the profits generated by operations and any increase in
the Company's value. Similarly, the Remaining Shareholders will also bear the
risk of any decrease in the value of the Company.
Consummation of the Offer and the Merger will allow the Remaining
Shareholders to recapitalize the Company by increasing its debt to equity ratio,
thereby leveraging their equity investment to a degree that might not be
appropriate for Wedgestone as a public company. Such high leveraging entails
high risk to equity investors. Furthermore, high leveraging and associated high
debt service costs may have an adverse effect on earnings and the market price
of the SBI.
Under Massachusetts law, the approval of the Board and the affirmative
vote of the holders of 66 2/3% of the outstanding SBI are required to approve
the Merger through a meeting of the shareholders. The Board has approved the
Merger, and, unless the Merger is consummated pursuant to the short-form
merger provisions of Massachusetts law as described below, the only other
required corporate action by the Company is the approval and adoption of the
Merger by the affirmative vote of the holders of at least 66 2/3% of the SBI.
If 1,423,142 or more Shares are tendered pursuant to the Offer, the
Remaining Shareholders will have sufficient voting power to cause the
approval and adoption of the Merger immediately after the Offer, without the
affirmative vote of other shareholders of the Company.
Under the Massachusetts general laws with respect to business trusts and
the Massachusetts Business Corporation Law ("MBCL"), an entity which owns 90%
or more of the outstanding shares of another entity may effect a merger with
such other entity without submitting the merger to a vote of shareholders of
the other entity (a "short-form merger"). Accordingly, if the Remaining
Shareholders own 90% or more of the SBI that remain outstanding after
completion of the Offer, the Merger may be effected as a short-form merger,
without a vote of the Company's shareholders. In such event, the Remaining
Shareholders and the Company have agreed to take all necessary and
appropriate action to cause the Merger to become effective in accordance with
the MBCL as promptly as practicable after consummation of the Offer, without
a meeting of the shareholders of the Company.
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If, however, the percentage of ownership of the Remaining Shareholders after
completion of the Offer is less than 90% of the SBI then outstanding, a vote
of the Company's shareholders will be required under the applicable laws, and
a significantly longer period of time may be required to effect the Merger.
See "Special Factors - Rights of Shareholders in the Event of a Merger."
Following consummation of the Offer and the Merger, the Shares will no longer
be quoted on the OTCBB and the registration of the Shares under the Exchange
Act will be terminated. Accordingly, following the Merger, there will be no
publicly traded equity securities of the Company outstanding and the Company
will no longer be required to file periodic reports with the Commission. See
"The Tender Offer - Section 11. Effect of the Offer on the Market for
Shares; Quotation and Exchange Act Registration."
All Shares purchased in the Offer will be held in the treasury of the
Company until the completion of the Merger, if necessary, at which time the
Shares will be retired by the taking of all required corporate action and
filings with the office of the Massachusetts Secretary of State.
Since June 15, 1992, when the Investors acquired a significant ownership
position in the Company, the Investors believe that the public market has not
responded to sustained profitability of the Company, and the SBI have remained
very thinly traded and have provided little liquidity for shareholders,
particularly those shareholders with larger equity positions in the Company.
Reversion of the Company to private ownership will eliminate the
substantial general and administrative costs attendant to the Company's
status as a reporting company under the Exchange Act. In addition to the
time expended by Company management, the legal, accounting and other expenses
involved in the preparation of annual and other periodic reports are
considerable. The Company estimates that its total out-of-pocket expenses
associated with maintaining its public status are approximately $125,000 per
year. These costs include the preparation of periodic reports to the
Securities and Exchange Commission (such as Form 10-K and Form 10-Q), legal
and accounting fees relating to such matters, annual fees for the Company's
transfer agent and costs of maintaining director and officer insurance. These
costs do not include the salaries and time of employees of the Company who
devote time to these matters.
Additionally, the Company's management believes that required public disclosures
under the Exchange Act have given its competitors, who are not similarly
burdened, certain information and insights about the Company's operations which
have helped them in competing with the Company.
The Company has been unable to utilize the SBI effectively for
acquisitions, financing, or employee incentives because of (i) its low market
price and low trading volume and (ii) limitations that would be imposed on the
use of net operating loss carryforwards after the issuance of additional shares,
and so has been unable to realize the principal benefits of public ownership.
For these reasons, the Remaining Shareholders informed the Board of
Directors of the Company (the "Board") on October 7, 1997 that they desired to
convene a meeting of the Board on October 15, 1997 for the purpose of further
exploring the feasibility of a "going private" transaction. In subsequent
conversations with the Company's principal lender, the Remaining Shareholders
discussed the possibility of providing financing to the Company for such a
transaction.
At the October 15, 1997 Board meeting, a general discussion was held
concerning the proposed transaction, and the Board determined that the
proposed transaction should be explored and formed a committee of independent
directors consisting of John J. Doran, Jeffrey A. Oberg and Jeffrey S.
Goldstein (the "Independent Committee"). Counsel to the Company discussed
the process involved in a "going private" transaction and explained to the
Board the fiduciary duties of the members of the Independent Committee to the
Public Shareholders. The Independent Committee was given the authority to
select a reputable and experienced brokerage firm to render a fairness
opinion to the Independent Committee relating to the proposed transaction.
The Remaining Shareholders subsequently orally indicated that they were
willing to commit to a transaction at an offer price of $0.65 per Share, net
to the seller in cash.
5
<PAGE>
At a meeting held on October 15, 1997, the Independent Committee
reviewed and evaluated the factors leading up to the Company's decision to
propose the possibility of "going private." These factors included the
costs to the Company of being a public entity, the lack of an active trading
market for the SBI and the lack of liquidity for shareholders. The
Independent Committee also reviewed the Company's financial condition, the
condition of the automotive aftermarket industry in which the Company
participates and recent downward trends in the bumper market, the Company's
historical core business segment. The Independent Committee also discussed
that the Company had indicated that it would need to diversify its product
lines and markets and therefore would develop this strategy both internally
and through seeking future acquisitions. The Independent Committee
considered, based on management reports, that the Company would not be able
to use its SBI to finance future acquisitions and was unlikely to be able to
raise additional cash to finance future acquisitions through the sale of SBI.
On November 24, 1997 and December 5, 1997, the Independent Committee met
to discuss, among other things, the engagement of an investment banker to
serve as financial advisor to the Independent Committee. The Independent
Committee solicited proposals from investment banks regarding their interest
in serving as financial advisor to the Independent Committee in connection
with the evaluation of the Offer. On December 8, 1997, the Independent
Committee decided to retain Commonwealth Associates as its exclusive
financial advisor to render an opinion as to the fairness of the
consideration in the proposed transaction. Commonwealth Associates was
selected based on its proposal and its experience in evaluating similar kinds
of transactions. The terms of the engagement of Commonwealth Associates by
the Independent Committee were finalized by a letter agreement dated December
24, 1997.
No limitations were imposed by the Independent Committee, the Board of
Directors or management of the Company on Commonwealth Associates with respect
to the investigation made, or the procedures followed in rendering the fairness
opinion; however, Commonwealth Associates' assignment did not include
investigating or pursuing any other parties interested in acquiring control of
the Company, and Commonwealth Associates did not solicit any offers for the
acquisition of the Company because the Independent Committee instructed
Commonwealth Associates that the Remaining Shareholders were unwilling to
consider a sale of their interest in the Company.
Because of the appointment of the Independent Committee and the engagement
of Commonwealth Associates to render a fairness opinion, the Independent
Committee did not consider it necessary to retain any other unaffiliated
representative to act solely on behalf of the Public Shareholders for the
purpose of negotiating the terms of the Offer.
During the period between the engagement of Commonwealth Associates and
the presentation of its final report to the Independent Committee on January
30, 1998, the Independent Committee received copies of materials provided by
the Company to Commonwealth Associates in connection with its analysis.
During this period, members of the Independent Committee received calls from
Commonwealth Associates with respect to the progress of their work, including
a review of various matters relevant to the deliberations of the Independent
Committee, including the prospects for the Company's bumper business.
A meeting of the Independent Committee was held on January 14, 1998, at
which representatives of Commonwealth Associates presented their preliminary
report to the Independent Committee concerning their opinion as to the
fairness, from a financial point of view, of an initial cash offer of $0.65
per Share to the Public Shareholders, and were questioned by the Independent
Committee concerning the methods used and factors considered by Commonwealth
Associates in rendering the preliminary report. Commonwealth Associates
reported that, in its opinion, the initial offer price of $0.65 per Share was
fair to the Public Shareholders, from a financial point of view. At this
meeting, Commonwealth Associates summarized its valuation analysis with
included valuations based on (a) the Company's historical operating results
and current financial condition, (b) projected discounted net income, (c)
projected discounted cash flow (assuming maintenance of net operating loss
carryforwards) and (d) projected discounted cash flow (assuming full loss of
net operating loss carryforwards). See "Special Factors -- Opinion of
Commonwealth Associates." The Company had been unable to identify to
Commonwealth Associates, and Commonwealth Associates noted that they were
also unable to identify, any public company that could be considered
comparable to the Company for use in preparing its analysis. Nonetheless,
the Independent Committee requested that Commonwealth Associates provide the
analysis of publicly traded companies within the Company's standard
industrial classification code.
The Independent Committee held a meeting with David L. Sharp and Eric H.
Lee, the Company's President and Chief Financial Officer, respectively, on
January 15, 1998 to discuss the assumptions and forecasts provided to, and
relied upon by, Commonwealth Associates in preparing its analysis. The
Independent Committee also questioned management regarding current industry
and market conditions, the potential to pursue other opportunities to
diversify the Company's product line, both internally and through
acquisitions, and the assumptions relating to capital expenditures for
retooling for bumper lines and other matters. Based on those discussions,
management and the Independent Committee determined that certain of the
assumptions included in the forecasts previously supplied to Commonwealth
Associates would need to be corrected or revised. Accordingly, the
Independent Committee requested management to make such corrections or
revisions and to provide the revised information to Commonwealth Associates
for their review and consideration.
A meeting of the Independent Committee was held on January 30, 1998, at
which representatives of Commonwealth Associates presented their final
report, after consideration and inclusion of the revised assumptions in
connection with the forecasts, to the Independent Committee concerning their
opinion as to the fairness, from a financial point of view, of the initial
cash offer of $0.65 to the Public Shareholders.
6
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On January 30, 1998, the Independent Committee met to discuss the offer
of $0.65 per Share. In light of all of the circumstances of the transaction,
including the lack of comparable company or transaction information, the
Independent Committee determined to negotiate a price of $0.70 per Share for
the benefit of the Public Shareholders. Further, since the Company did not
seek (and the Remaining Shareholders who collectively own 62.3% of the SBI
would not consider a sale to) any third party buyers as an alternative to the
"going private" transaction, the Independent Committee determined that to
ensure a fair procedure for the Remaining Shareholders, that a "clawback
right" for the benefit of the Public Shareholders would be appropriate.
On February 2, 1998, Mr. Goldstein presented the proposal from the
Independent Committee to Mr. Shaw, a representative of the Remaining
Shareholders, together with the reasons for the proposal. Mr. Shaw indicated,
on a preliminary basis, that the Company would consider raising the offer
price above $0.65 per Share. Over the next several days, Mr. Shaw discussed
the proposal from the Independent Committee with the other Remaining
Shareholders and further discussions were held between Mr. Shaw, Mr. Pinto
and Mr. Goldstein. On February 3, 1998, a meeting was held with Mr.
Goldstein, Mr. Oberg, Mr. Doran, Mr. Shaw and Mr. Pinto at which it was
agreed to accept a price of $0.67 per Share and a clawback privilege for one
year.
Pursuant to a Clawback Agreement between the Company and the Remaining
Shareholders dated February 9, 1998, in the event that, with respect to the
Company (or any successor to the Company), there is: (i) a change in control,
(ii) a disposition of substantially all of the assets, or (iii) a liquidation
(collectively, a "Transaction") at any time within one year following the
later of the date of consummation of the Offer or the date of consummation of
the Merger or the shareholders meeting approving the Merger, which
Transaction results in the receipt by the Remaining Shareholders of a sum in
excess of $14,663,398 (i.e., the Offer Price multiplied by the 21,885,668
Shares currently issued and outstanding), 37.6% (i.e., the Public
Shareholders' ownership percentage of the Company) of such excess will be
paid over proportionately to each of the Public Shareholders of record on the
date immediately preceding the expiration date of the Offer.
On February 9, 1998, the Board, by unanimous vote of all trustees present
and voting, based in part on the unanimous recommendation and approval of the
Independent Committee, determined that the Offer is fair to and in the best
interests of the Public Shareholders of the Company. The Board, by a unanimous
vote of all trustees present and voting, recommended that all Public
Shareholders accept the Offer and tender their Shares pursuant to the Offer.
Prior to the commencement of trading on February 10, 1998, the Company issued a
press release regarding the Offer.
The Remaining Shareholders have informed the Independent Committee that,
assuming the completion of the Offer and the Merger, they have no present
intention to cause the Company to change its fundamental business, sell or
otherwise dispose of any material part of its business, merge, liquidate or
otherwise wind-up its business. Nevertheless, the Remaining Shareholders may
initiate a review of the Company and its assets, corporate structure,
capitalization, operations, properties and personnel to determine what changes,
if any, would be desirable following the Offer to enhance the operations of the
Company.
The assumptions underlying the forecasts supplied by the Company to Commonwealth
Associates addressed the Company's current and future expectations on its
primary products as follows.
(a) TUBULAR AFTERMARKET STEEL ACCESSORIES. The future sale of these
products is subject to the target vehicle aftermarket, and to the consumer's
continued acceptance of the appearance of these products on their vehicles. The
Company participates in a cyclical automotive industry that is entering its
fifth year of continuous expansion, outlasting most prior upward cycles. While
a downward cycle is not part of management assumptions for the immediate future,
sales of traditional aftermarket tubular products are assumed to peak in 1999.
Beyond 1999, management expects that sales of these products will be affected
by the Company's performance on several supplier agreements from OE
manufacturers calling for the direct supply of tubular products. Management
believes that as the Company and its competitors fulfill such supply agreements,
there will be a proportionate drop in the traditional tubular aftermarket for
these products. As a result, management has forecasted a decline in tubular
aftermarket accessory sales in 2000 and a further decline in 2001.
(b) TRADITIONAL AFTERMARKET BUMPERS. In the past, bumpers have been
sold to dealerships who have chosen to delete the factory bumper in exchange
for the enhanced profitability associated with selling an aftermarket bumper.
This practice is declining rapidly due to (i) the OE manufacturer's current
practice of integrating the bumper into the overall design of the vehicle and
the Company's lack of suitable look-alike alternatives and, (ii) a
significant effort on the part of the OE manufacturers to improve dealer
loyalty for their products which have been promoted through the use of
pricing strategies designed to enhance dealer profits and have significantly
eroded the Company's sales of bumpers to new vehicle dealers. Considering
the impact of OE manufacturer strategies and the effect of changing designs
of the light duty pickup truck bumpers, management has forecasted significant
declines in bumper business over the next four years.
(c) OE PRODUCTS. In recent years, particularly with the development of
new truck designs, the OE manufacturers have increased their own line of
aftermarket truck accessories. The Company has been accepted as an OE
supplier and has entered into supplier agreements with several OE
manufacturers for step bars, grille guards, light bars, push bars and combo
bars. These supplier agreements do not provide for guaranteed quantities or
exclusivity, require annual renewals, and are subject to continued consumer
acceptance of tubular accessories on light duty trucks and sport utility
vehicles. In estimating future OE aftermarket product sales, management is
relying on previous experience in dealing with OE manufacturer volumes as a
percentage of applicable vehicles produced.
(d) CAPITAL INVESTMENT: With respect to its bumper products, unless
significantly more cost effective alternatives can be identified, the Company
does not intend to invest additional capital into new bumper tooling. Tooling
will, however, be developed for tubular steel accessories to the extent that
new truck models are introduced and/or the Company believes it can expand its
market share.
(e) PRO FORMA PROFITABILITY. In the past, management has been
successful in offsetting most of the impacts of inflation through the
reduction of manufacturing labor and material costs. Management expects this
process to continue and, given the current level of inflation, has not
planned (except with respect to engineering overhead discussed below) for a
rise in the cost of materials, services or manufacturing labor and overhead.
Pro forma gross margin, therefor, is subject to overall volumes and product
mix as some products afford less gross margin than others. As bumper volumes
decline and OE product volumes increase, the overall gross margin percent
will decline due to the lower quoted margin of the OE aftermarket products
compared to the traditional aftermarket products. Additionally, continued
conversion to OE aftermarket products will require continued investments in
engineering overhead. Offsetting the effect of lower gross margins on OE
aftermarket products and the effects of increasing investments in engineering
overhead is a corresponding drop in the freight and marketing costs for these
products which are paid for by the OE manufacturer. The overall decline in
pro forma income from operations is therefor due to (i) a declining gross
margin due to assumed sales mix and, (ii) the impact on earnings associated
with lower overall sales volumes due to the decline in traditional bumper
sales which exceed management's estimate of the growth in OE aftermarket
products.
Management believes that consummation of the Offer and the Merger will
result in substantially greater flexibility for the Company in the utilization
of assets and in the planning of its future. If the Offer and the Merger are
completed, management will be able to make substantial new investments in the
metal fabrication industry and other businesses without considering whether
other shareholders would approve of such decisions. Such flexibility is
believed to be especially appropriate in view of the belief of management that
the risks of making such investments may not be appropriate for the Company as a
publicly-held entity.
The Company anticipates that the Remaining Shareholders will replace all
three of its current independent trustees (other than John C. Shaw) with
successor trustees as soon as practicable as trustees of the Company following
the consummation of the Offer and, if necessary, the Merger. The persons who
are presently officers of the Company will continue in their same positions
following consummation of the Offer and, if necessary, the Merger.
As a result of the borrowing incurred in connection with the financing of
the Offer and, if necessary, the Merger, the consolidated indebtedness of the
Company will be substantially greater. See "The Tender Offer - Section 8.
Financing of the Offer and the Merger."
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Following consummation of the Merger, the Shares will no longer be
quoted on the OTCBB, and the registration of the Shares under the Exchange
Act will be terminated and, accordingly, the Company will no longer be
required to file periodic reports with the Commission.
2. RIGHTS OF SHAREHOLDERS IN THE EVENT OF THE MERGER
No appraisal rights are available in connection with the Offer. However,
if the Merger is consummated, shareholders who have not tendered their Shares
will have certain rights to dissent and demand appraisal of, and to receive
payment in cash of the fair value of their Shares. In SULLIVAN V. FIRST
MASSACHUSETTS FINANCIAL CORP., 569 N.E.2d 814 (Mass. 1991), the court held,
among other things, that dissenting minority shareholders of a Massachusetts
business trust have a common law right of appraisal similar to the statutory
right provided under the MBCL to corporate shareholders.
If a dissenting shareholder were to exercise such appraisal rights in
connection with the Merger, and if the Company and such shareholder were
unable to agree on the fair value of the Shares, a court would determine the
fair value of the Shares, as of the day prior to the date on which the
shareholders' vote was taken approving the Merger. The fair value of the
Shares would be paid in cash to such dissenting shareholder. In determining
the fair value of the Shares, the court is required to take into account all
relevant factors. Accordingly, such determination could be based upon
considerations other than, or in addition to, the market value of the Shares,
including, among other things, asset values and earning capacity. Therefore,
the value so determined in any appraisal proceeding could be the same as, or
more or less than, the price received in the Merger.
In addition, Massachusetts courts have held that, in certain circumstances,
a controlling shareholder of a company involved in a merger has a fiduciary duty
to other shareholders that requires that the merger be fair to such other
shareholders. In determining whether a merger is fair to minority shareholders,
Massachusetts courts have considered, among other things, the type and amount of
consideration to be received by the shareholders and whether there was fair
dealing among the parties.
The foregoing summary of the rights of dissenting shareholders does not
purport to be a complete statement of the procedures to be followed by
shareholders desiring to exercise any available appraisal rights and is
qualified in its entirety by reference to the full text of Sections 85-98 of the
MBCL included in Schedule III attached hereto. The preservation and exercise of
appraisal rights are conditioned on strict adherence to the applicable
provisions of the MBCL.
3. RECOMMENDATION OF THE COMPANY'S BOARD; FAIRNESS OF THE OFFER
RECOMMENDATION OF THE COMPANY'S BOARD. On February 9, 1998, the Board, by
unanimous vote of all trustees present and voting, based in part on the
unanimous recommendation and approval of the Independent Committee, determined
that the Offer is fair to and in the best interests of the Public Shareholders
of the Company, subject only to receipt of a firm commitment from the Company's
principal lender to provide financing. The Board, by a unanimous vote of all
trustees present and voting, has recommended that all Public Shareholders accept
the Offer and tender their Shares pursuant to the Offer.
8
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FAIRNESS OF THE OFFER. In reaching its determinations referred to
immediately above, the Board considered the following factors, each of which, in
the view of the Independent Committee as well as the other member of the Board,
supported such determinations.
a. The Independent Committee considered the historical market
prices and recent trading activity of the Shares, including the fact that
the $0.67 net per Share cash consideration to be paid to the Public
Shareholders in the Offer represents a premium of approximately 91.4% per
Share over the last reported sales price on February 6, 1998, the last
full trading day preceding the public announcement of the Offer and a
premium of approximately 71.8% and 168.0% over the average closing price
for the one-month and three-month periods, respectively, preceding such
date and the fact that such price would be payable in cash, thus
eliminating any uncertainties in valuing the consideration to be received
by the Company's Public Shareholders. Since there is a low trading volume
for the Shares, the relevance of this factor in determining the fairness
of the Offer is unclear.
b. The Independent Committee considered the number of odd-lot
shareholders, who by virtue of the low trading volume in the Shares, the
brokerage fees associated with sales, and the low market price of the
Shares, are unable to realize any appreciable benefits on the sale of
their Shares.
c. The Independent Committee considered the opinion of Commonwealth
Associates to the Independent Committee that the consideration to be
offered to the Public Shareholders is fair to such shareholders from a
financial point of view and the report and analysis presented by
Commonwealth Associates, which included discussion and analysis of
historical trading volume and market prices, multiples of historical and
forecasted net income from operations, cash flow from operations, book
value and various other factors. With respect to the matters contained
in the opinion of Commonwealth Associates, the Independent Committee
reviewed the report and considered and accepted the basis of the
analysis contained therein and considered the other factors set forth
herein in determining that the Offer is fair.
d. The Independent Committee reviewed the market price for the
Shares as compared to the performance of the Company.
e. The Independent Committee reviewed the nature of the Company's
business and the industry in which the Company operates, including
information received by the Board regarding trends in the bumper
industry and various uncertainties associated with current and potential
future industry and market conditions. The Company participates in a
cyclical automotive industry that is entering its fifth year of
continuous expansion, outlasting most prior upward cycles. Management
believes that tubular aftermarket accessory sales will peak in 1999 and
decline thereafter. Further, the Company has experienced a decline in
bumper sales which management believes will continue to decline during
the next several years. See "Special Factors -- Purpose and Background
of the Offer; Certain Effects of the Offer; Plans of the Company after
the Offer."
f. The Independent Committee considered the opportunity provided
by the Offer for a substantial number of shareholders to realize a
premium for their Shares in the near future as compared to market
prices that, absent the Offer and the Merger, are likely to continue to
be significantly below the Offer price.
g. The Independent Committee the structure of the transaction,
which is designed, among other things, to result in the receipt by the
Public Shareholders of cash consideration at the earliest practicable
time without any brokerage fees.
h. The Independent Committee the fact that the Company has not
paid a cash dividend during the last five years to the holders of SBI,
and the expectation that no such cash dividends are expected to be paid
in the foreseeable future. Since emerging from bankruptcy in 1992, the
Company has retained its earnings to finance the development of its
business. The Company intends to retain future earnings, if any, to
further develop its business.
i. The Independent Committee the stated desire of the Remaining
Shareholders not to consider a sale of their majority interest in the
Company, which made pursuit of other potential alternatives (such as a
sale of the Company as a going concern) impracticable.
9
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j. The Independent Committee considered the intention of the
Remaining Shareholders to continue the business as a going concern,
which makes any consideration of liquidation of the Company or values
that ultimately might be obtained from such a liquidation highly
speculative.
k. The Independent Committee considered the availability of
dissenters' rights under Massachusetts law in the event of the Merger.
The members of the Board, including the Independent Committee, evaluated
the various factors listed above in light of their knowledge of the business,
financial condition and prospects of the Company, and based on the advice of the
financial advisor. In light of the number and variety of factors that the Board
and the Independent Committee considered in connection with their evaluation of
the Offer, neither the Board nor the Independent Committee found it practicable
to assign relative weights to the foregoing factors, and, accordingly, neither
the Board nor the Independent Committee did so. The Independent Committee and
the Board, however, gave significant weight to the factors specified in clauses
(a) through (f), inclusive, above.
In addition to the factors listed above, the Board and the Independent
Committee had each considered the fact that consummation of the Offer would
eliminate the opportunity of the Public Shareholders to participate in any
potential future growth in the value of the Company, but determined that this
loss of opportunity was ameliorated in part by the price of $0.67 net per Share
to be paid in the Offer as well as the agreement of the Remaining Shareholders
to share any excess proceeds from a private sale of the Company within one year
after the consummation of the Offer under the Clawback Agreement. See "Special
Factors -- Purpose and Background of the Offer; Certain Effects of the Offer;
Plans of the Company after the Offer."
In connection with its deliberations, the Independent Committee did not
consider, and did not request that Commonwealth Associates evaluate, the
Company's liquidation value. The Board did not view the Company's
liquidation value to be a relevant measure of valuation given that the Offer
price significantly exceeded the book value per Share of the Company on
September 30, 1997, and it was the Board's view that the Company is more
valuable as a going concern than its net book value of $0.38 per share as of
December 31, 1997.
Further, while it is possible that prices of certain of the Company's
assets might be realized in a liquidation at prices in excess of the book
values over a period of time, the Independent Committee believed that the
length of time to accomplish an orderly liquidation, overall costs attendant
to liquidation and the fact that certain assets would have to be sold at a
discount (particularly inventory) in a liquidation would possibly offset any
gains on other assets. In addition, substantial expenses could be incurred
in a liquidation in connection with contract terminations, severance pay and
other matters, as well as legal fees and brokers commissions. In view of
these factors, the Independent Committee believed that it would be highly
unlikely that liquidation would generate net proceeds with a current value in
excess of $0.67 per Share. However, there can be no assurance that the
liquidation value would not produce a higher valuation of the Company than
its value as a going concern.
To the Company's knowledge after reasonable inquiry, each of the Company's
trustees and all of the Company's employees who hold stock options presently
intend to exercise such options and to either tender all Shares owned by such
persons to the Company pursuant to the Offer or to vote in favor of the Merger
at a duly called shareholders' meeting.
In addition, the Independent Committee determined that the Offer and the
Merger are procedurally fair to the shareholders of the Company because,
among other things (i) the Independent Committee, consisting entirely of
independent directors, was formed to evaluate and negotiate the terms of the
Offer on behalf of the Public Shareholders, (ii) the Independent Committee
retained Commonwealth Associates to render a fairness opinion with respect to
the Offer and the Merger, (iii) there were deliberations pursuant to which
the Independent Committee evaluated the Offer and the Merger and (iv) a $0.02
per Share increase in the initial offer price and a one year clawback right
to the Public Shareholders resulted from active arm's-length bargaining
between the Independent Committee and the Remaining Shareholders. The
Independent Committee did not retain an independent representative to assist
in evaluating the Offer.
The Remaining Shareholders also believe the Offer is fair to the Public
Shareholders based on (i) the conclusions of, and approval of the Independent
Committee, as well as the basis therefor, which conclusion and basis, as set
forth above, are incorporated by reference herein, (ii) notwithstanding the
fact that Commonwealth Associates opinion was provided for the information
and assistance of the Independent Committee and that the Remaining
Shareholders are not entitled to rely on such opinion, the fact that the
Independent Committee had received the written opinion of Commonwealth
Associates that the initial offer price of $0.65 in cash was fair to the
Public Shareholders, and (iii) the fact that the Independent Committee
negotiated a price of $0.67 per share and clawback privileges on an
arms-length basis.
The Remaining Shareholders did not find it practical to, and did not,
quantify or otherwise attach relative weights to the specific factors
considered by them.
4. OPINION OF COMMONWEALTH ASSOCIATES
Commonwealth Associates was engaged to render an opinion to the
Independent Committee as to the fairness, from a financial point of view, of
an initial offer price of $0.65 per Share, net to the seller in cash (the
"Initial Offer") to the Company's Public Shareholders. See "Special Factors
- --Purpose and Background of the Offer; Certain Effects of the Offer."
10
<PAGE>
On January 14, 1998, in connection with the Independent Committee'
evaluation of the Initial Offer, Commonwealth Associates made a preliminary
presentation to the Independent Committee with respect thereto (the "Report").
As part of the presentation, Commonwealth Associates, reviewed with the
Independent Committee certain of the information and financial data described
below.
On January 30, 1998, representatives of Commonwealth Associates presented
their final report to the Independent Committee concerning their opinion as to
the fairness, from a financial point of view, of the Initial Offer to the Public
Shareholders.
Final copies of the Report dated January 30, 1998 were delivered to the
Independent Committee in connection with the Independent Committee's evaluation
of the Initial Offer. A copy of the Report is available for inspection and
copying at the offices of the Company during regular business hours by any
interested Public Shareholder or his representative who has been so designated
in writing.
Commonwealth Associates delivered its written opinion to the Independent
Committee dated January 30, 1998 (the "Commonwealth Associates Opinion"). A
copy of the Commonwealth Associates Opinion, which sets forth the assumptions
made, matters considered and limitations of review undertaken by Commonwealth
Associates, is attached as Schedule II hereto.
No limitations were imposed by the Company, the Board or the Independent
Committee on the scope of the Commonwealth Associates investigation or the
procedures to be followed by Commonwealth Associates in rendering the
Commonwealth Associates Opinion, except that Commonwealth Associates was not
authorized to solicit, and did not solicit, any indications of interest from
any third party with respect to a purchase of all or a part of the Company's
business. Commonwealth Associates was not requested to and did not make any
recommendation to the Public Shareholders in the Initial Offer, which was
determined through discussions among the Independent Committee as to the form
or amount of consideration to be offered to the Public Shareholders in the
Initial Offer, which was determined through discussions among the Independent
Committee. In arriving at the Commonwealth Associates Opinion, Commonwealth
Associates did not ascribe a specific range of value to the Company, but
rather made its determination as to the fairness, from a financial point of
view, of the consideration to be offered to the Public Shareholders in the
Initial Offer on the basis of the financial and comparative analyses
described below.
The Commonwealth Associates Opinion is for the use and benefit
of the Independent Committee and was rendered to them in connection with their
consideration of the Initial Offer and is not intended to be and does not
constitute a recommendation to any Public Shareholder as to whether to accept
the consideration to be offered to such Public Shareholder in the Offer.
The Company's Independent Committee engaged Commonwealth Associates to
render the opinion referred to above because Commonwealth Associates regularly
engages in the valuation of businesses and their securities. The Independent
Committee requested bids from two other investment banking firms and decided to
retain Commonwealth Associates based on their evaluation of all the bids.
11
<PAGE>
The following paragraphs summarize the financial and comparative analyses
performed by Commonwealth Associates in connection with their opinion. The
summary does not represent a complete description of the analyses performed by
Commonwealth Associates.
In arriving at the Commonwealth Associates Opinion, Commonwealth
Associates: (a) reviewed certain publicly available historical financial and
operating data concerning the Company including the Annual Report to
Stockholders and Annual Report on Form 10-K for the year ended December 31, 1996
and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997,
June 30, 1997, and September 30, 1997; (b) interviewed certain members of senior
management of the Company to discuss the prospects for the Company's business;
(c) reviewed certain information of the Company, including financial forecasts
relating to the business, earnings, cash flow, assets and prospects of the
Company prepared by the management of the Company; (d) reviewed publicly
available financial operating and stock market data concerning certain companies
engaged in businesses which the Company's management deemed relatively
comparable to the Company; (e) inquired as to the financial terms of certain
recent transactions the Company's management deemed relevant to the analysis;
(f) reviewed the historical market prices and trading volumes of the Company's
Shares; (g) reviewed the relationship between the Company's Shares' historical
market prices and its reported earnings per share data; and (h) reviewed and
conducted such other financial studies, analyses and investigations as
Commonwealth Associates deemed appropriate.
In arriving at the Commonwealth Associates Opinion, Commonwealth
Associates assumed and relied upon the accuracy and completeness of the
financial information provided by the Company and other information used by
Commonwealth Associates without assuming any responsibility for independent
verification of such information and further relied upon the assurances of
management of the Company that they were not aware of any facts that would
make the information provided by the Company inaccurate or misleading. With
respect to the financial projections of the Company, Commonwealth Associates
assumed that such projections were prepared in good faith on a basis
reflecting the best currently available estimates and judgments of the
management of the Company as to the future financial performance of the
Company. In arriving at the Opinion, Commonwealth Associates conducted a
limited physical inspection of the properties and facilities of the Company
and did not make any evaluations or appraisals of the assets or liabilities
of the Company and was not presented with any such appraisal. The
Commonwealth Associates Opinion was necessarily based upon economic,
financial, market and other conditions as they existed on, and could be
evaluated as of, the date of the Commonwealth Associates Opinion.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial and comparative analysis
and the application of those methods to the particular circumstances and,
therefore, such an opinion is not readily susceptible to summary description.
Furthermore, in arriving at the Commonwealth Associates Opinion, Commonwealth
Associates did not attribute any particular weight to the analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevancy of each analysis and factor. Accordingly, Commonwealth
Associates believes that its analyses must be considered as a whole and that
considering any portions of its analyses and of the factors considered by it,
without considering all analyses and factors, could create a misleading or
incomplete view of the process underlying the Commonwealth Associates Opinion.
In its analyses, Commonwealth Associates made numerous assumptions with respect
to industry performance, general business and economic conditions and
12
<PAGE>
other matters, many of which are beyond the Company's control. Any estimates
contained in these analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than as set forth therein. Additionally, analyses relating to the
value of businesses do not purport to be appraisals or to reflect the prices at
which businesses actually may be sold.
OVERVIEW OF ANALYSES. Commonwealth Associates used both quantitative and
qualitative assessments to evaluate the Company. Commonwealth Associates'
determination that the consideration to be offered to the Public Shareholders is
fair, from a financial point of view, to the Public Shareholders is based on all
the quantitative and qualitative analyses described in the Commonwealth
Associates Opinion.
Commonwealth Associates conducted a number of analyses to determine a range
of per share equity values for the Company, including a discounted net income
analysis, a discounted cash flow analysis and a market multiples analysis.
Commonwealth Associates compared the consideration offered to the Public
Shareholders to the range of derived equity values for the Company.
QUALITATIVE CONSIDERATIONS. In addition to the quantitative analyses
discussed below, Commonwealth Associates considered a number of qualitative
factors related to the Company. Commonwealth Associates did not apply
weightings to these qualitative analyses. Qualitative factors related to the
Company included among other things (i) limited trading volumes; relatively
illiquid market; and (ii) the Company's practical inability to seek and consider
third party purchases.
QUANTITATIVE ANALYSES. Commonwealth Associates used the quantitative
analyses described below to evaluate the Company and derive implied aggregate
equity values and implied per share equity values for the Company.
(a) HISTORICAL AND PROJECTED FINANCIAL PERFORMANCE. Commonwealth
Associates reviewed the Company's historical financial performance for the
fiscal year ended December 31, 1996 and the quarters ended March 31, 1997, June
30, 1997 and September 30, 1997, and its projected performance as developed by
management based on assumptions management believed were reasonable for the
fiscal years ending December 31, 1997, 1998, 1999, 2000 and 2001.
(b) HISTORICAL MARKET PRICE ANALYSIS. Commonwealth Associates reviewed
the trading history of the Company's SBI for various trading periods between
April 8, 1994 and January 23, 1998, and determined that the Offer represents a
significant premium over the historic average market prices for the SBI. In
arriving at this conclusion, Commonwealth Associates noted that (i) while the
highest single closing price per share since April 8, 1994, was $0.875 on
November 7, 1994, the closing market price has not been above $0.65 per share
since September 14, 1996; (ii) the average weekly closing price of the SBI
during the period from April 8, 1994 to January 29, 1998, was $0.33 per share;
and (iii) the Offer represents a premium of approximately 94% over this average
weekly closing price. Commonwealth Associates also determined that the average
daily closing prices for the SBI were $0.44, $0.37 and $0.31 in calendar years
1995, 1996 and 1997, respectively, and that the Offer represents a premium of
49%, 75% and 110%, respectively, over such average daily closing prices.
(c) DISCOUNTED NET INCOME ANALYSIS. Commonwealth Associates conducted
a discounted net income analysis which derived implied total equity values
and implied per share equity values based on the present value of future net
income. In the exit year, net income included proceeds from the sale of the
business, which is typically assumed only for valuation purposes as a more
representative "terminal value" than using net income in perpetuity. The
terminal value was determined by applying a range of exit multiples from 6.0x
to 9.0x. Net income was discounted using a discount rate of 12.36%, which is
the Compound Annual Return for Small Company Stocks, 1926-1990, from STOCKS,
BONDS, BILLS AND INFLATION 1994 YEARBOOK, published by Ibbotson Associates.
The derived equity values were divided by the number of shares of the
Company's SBI outstanding, assuming the exercise of outstanding options for
995,000 SBI at an exercise price of $0.31 per share, and the buyback of SBI
in the open market at $0.65 per share, to derive implied per share equity
values. The results of this analysis indicated a range of per share equity
values of $0.58 to $0.74, and a median per share equity value of $0.66.
(d) DISCOUNTED CASH FLOW ANALYSES. Based on management's projections,
Commonwealth Associates conducted a discounted cash flow analysis which
derived implied total equity values and implied per share equity values based
on the present value of future net cash flows, less current net debt. The
analysis assumed the Company was able to maintain use of its net operating
losses ("NOLs"). For purposes of this analysis, annual free cash flows
equals de-levered net income, plus depreciation and amortization and deferred
income taxes, less capital expenditures, less the change in working capital.
In the exit year, free cash flow included proceeds from the sale of the
business, which is typically assumed only for valuation purposes as a more
representative "terminal value" than using cash flows in perpetuity. The
terminal value was determined by applying a range of exit multiples from 4.0x
to 7.0x. Net income was discounted using a discount rate of 12.53%, based
upon the Company's weighted average cost of capital ("WACC"). The derived
equity values were divided by the number of shares of the Company's SBI
outstanding, assuming the exercise of outstanding options for 995,000 SBI at
an exercise price of $0.31 per share, and the buyback of SBI in the open
market at $0.65 per share, to derive implied per share equity values. The
results of this analysis indicated a range of per share equity values of
$0.51 to $0.81, and a median per share equity value of $0.66.
Commonwealth Associates also conducted a discounted cash flow analysis
using the same methodology described above, but assuming the full loss of the
NOLs. In this analysis, net income was discounted using a discount rate of
10.45%, based on the Company's WACC assuming the full loss of the NOLs. The
derived equity values were divided by the number of shares of the Company's
SBI outstanding, assuming the exercise of outstanding options for 995,000 SBI
at an exercise price of $0.31 per share, and the buyback of SBI in the open
market at $0.65 per share, to derive implied per share equity values. The
results of this analysis indicated a range of per share equity values of
$0.37 to $0.61, and a median per share equity value of $0.49.
(e) MARKET MULTIPLES ANALYSIS. Commonwealth Associates conducted a market
multiples analysis for the Company which determined the implied public market
value based on earnings multiples. The Company had been unable to identify to
Commonwealth Associates, and Commonwealth Associates noted that they also were
unable to identify any public company that could be considered a trading
comparable for the Company. Among the factors considered in determining
comparability were the Company's market value, management's characterization of
the dynamics of the markets in which the Company's products compete, and the
specific products manufactured and sold by the Company. For purposes of this
market multiples analysis, Commonwealth Associates used the historical ratios of
the market prices of the SBI to the Company's earnings, determined at the end of
each calendar quarter from March 31, 1995 to December 31, 1997. These
price/earnings ratios were applied to the Company's 1997 estimated earnings to
derive implied public market values. The price/earnings ratios for the Company
were in a range of 1.98x to 7.75x, with a median ratio of 4.71x. The results of
this market multiples analysis indicated a range of per share equity values of
$0.26 to $1.01 and a median per share equity value of $0.61.
COMPARISON OF THE OFFER TO THE VALUES OF THE COMPANY. Commonwealth
Associates concluded that the consideration to be offered to the Public
Shareholders is fair, from a financial point of view, to the Public Shareholders
of the Company, based on, among other things, the following considerations:
(i) the Offer is at the high end of the range of median per share values of the
Company of $0.49 to $0.66; and (ii) the Offer represents a premium of 86% over
the closing price of the SBI on January 29, 1998, a premium of 94% over the
average weekly closing price of the SBI during the period from April 8, 1994 to
January 29, 1998, and a premium of 49%, 75% and 110% over the average daily
closing prices of the SBI in calendar years 1995, 1996 and 1997, respectively.
5. INTERESTS OF CERTAIN PERSONS IN THE OFFER AND THE MERGER
In considering the recommendation of the Board and the Independent
Committee with respect to the Offer and the fairness of the consideration to
be received in the Offer and the Merger (if necessary), shareholders should
be aware that certain officers and trustees of the Company have interests in
the Offer that are described below and which may present them with certain
potential conflicts of interest. John C. Shaw (Chairman of the Board,
Trustee and Chief Executive Officer of the Company) may be deemed to be
acting in concert with the Remaining Shareholders, who currently own 62.3% of
the outstanding SBI, and therefore to control the Company. In addition,
David L. Sharp and Eric H. Lee, the Company's President and Chief Financial
Officer, respectively, and Paul W. Westerhoff, Senior Vice President of
Operations for Wedgestone Automotive Corp., hold options to acquire an
aggregate of 511,003 SBI. These officers have informed the Company that they
will exercise such options but will not tender any SBI since they intend to
be affiliated with the Remaining Shareholders. The Board was aware of these
actual and potential conflicts of interest and considered them along with the
other matters described under "Special Factors -- Recommendation of the
Company's Board; Fairness of the Offer."
The Remaining Shareholders have informed the Company that they do not
intend to tender any SBI owned by them pursuant to the Offer. See "Special
Factors -- Beneficial Ownership of Common Stock." The Company also expects
that employees of the Company who are not affiliated with the Remaining
Shareholders will tender their Shares pursuant to the Offer.
Under the Massachusetts general laws, business trusts organized under
the laws of the Commonwealth of Massachusetts are permitted to indemnify
their current and former directors, officers, employees and agents under
certain circumstances against certain liabilities and expenses incurred by
them by reason of their serving in such capacities. The Company's
Declaration of Trust provides that each director and officer will be
indemnified by the Company against liabilities and expenses incurred in
connection with any threatened, pending or completed legal action or
proceeding to which he or she may be made a party or threatened to be made a
party by reason of being a director of the Company or a predecessor company,
or serving any other enterprise as a director or officer at the request of
the Company. The Company has also purchased directors' and officers'
liability insurance for the benefit of these persons.
6. BENEFICIAL OWNERSHIP OF SBI
The following table sets forth certain information, as of February 16,
1998, regarding the ownership of SBI by each person known by the Company to be
the beneficial owner of more than 5% of the outstanding SBI, each trustee of the
Company, the Chief Executive Officer of the Company, the other executive
officers of the Company, and all executive officers and trustees of the Company
as a group:
13
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNERS BENEFICIAL OWNERSHIP (1) CLASS
------------------------------------- ------------------------ -----------
<S> <C> <C>
TRUSTEES AND OFFICERS
David L. Sharp 251,600 1.1%
Eric H. Lee 160,000 *
Paul W. Westerhoff 185,000 *
John C. Shaw 8,499,922(2) 38.8%
Jeffrey S. Goldstein 85,000 *
Jeffrey A. Oberg 15,000 *
John J. Doran 15,000 *
All trustees and officers as a group 9,211,522 40.8%
5% SHAREHOLDERS
Stockwood LLC 6,795,223 31.0%
520 Madison Avenue, 40th Floor
New York, NY 10022
JCS Management Co., Inc. 8,499,922(2) 38.8%
520 Madison Avenue, 40th Floor
New York, NY 10022
PFG Corp. 1,713,865(3) 7.8%
235 Sunrise Boulevard
Palm Beach, FL 33480
RAB Management Corp. 1,720,699(4) 7.9%
520 Madison Avenue, 40th Floor
New York, NY 10022
JMS Holdings Co., Inc. 1,704,698(5) 7.8%
520 Madison Avenue, 40th Floor
New York, NY 10022
Charles Brady 1,300,000(6) 5.9%
1315 Peachtree Street N.E., Suite 300
Atlanta, GA 30309
</TABLE>
____________________
* Represents less than 1% of the issued and outstanding shares.
14
<PAGE>
(1) The Shares shown in the table as beneficially owned include any Shares that
the person has the right to acquire within 60 days of February 16, 1998, by
the exercise of an option from the Company. The Shares subject to such
options are as follows: Mr. Sharp: 251,600 shares; Mr. Lee: 160,000
shares; Mr. Westerhoff: 185,000 shares; Mr. Goldstein: 85,000 shares;
Mr. Doran: 15,000 shares; Mr. Oberg: 15,000 shares; and all executive
officers and trustees as a group: 711,600 shares.
(2) Mr. John C. Shaw is the president and sole shareholder of JCS Management
Co., Inc. Of these shares, 6,795,223 shares are held by Stockwood LLC.
Resource Holdings Associates owns 75% of the equity of Stockwood LLC and
Mr. Shaw is a managing director of the general partner of Resource Holdings
Associates.
(3) Mr. James J. Pinto is the president and sole shareholder of PFG Corp.
Mr. Pinto is also the president and a substantial shareholder of P-wood,
Inc., which owns 25% of the equity of Stockwood LLC.
(4) Mr. Richard A. Bartlett is the president and sole shareholder of RAB
Management Corp.
(5) Mr. Jerry M. Seslowe is the president and sole shareholder of JMS Holdings
Co., Inc.
(6) Includes 100,000 shares held by Chattahoochee Leasing Corporation, an
affiliate of Mr. Brady.
7. FEES AND EXPENSES
The following is an estimate of expenses incurred or to be incurred in
connection with the Offer. Also see "The Tender Offer -- Section 13. Fees and
Expenses."
<TABLE>
<S> <C>
Legal Fees. . . . . . . . . . . . . . . .$ 100,000
Printing and Mailing. . . . . . . . . . . . 45,000
Filing Fees . . . . . . . . . . . . . . . . .2,500
Depositary Fees . . . . . . . . . . . . . . 30,000
Information Agent Fees. . . . . . . . . . . 12,000
Investment Bankers' Fees. . . . . . . . . .100,000
Accountants' Fees . . . . . . . . . . . . . 12,500
Financing Fees. . . . . . . . . . . . . . .130,000
Miscellaneous . . . . . . . . . . . . . . . 25,000
TOTAL. . . . . . . . . . . . . . . . $457,000
--------
</TABLE>
15
<PAGE>
THE TENDER OFFER
1. TERMS OF THE OFFER; EXPIRATION DATE. Upon the terms and subject to
the conditions of the Offer (including, if the Offer is extended or amended,
the terms and conditions of such extension or amendment), the Company will
accept for payment, and will pay for, all Shares validly tendered prior to
the Expiration Date (as hereinafter defined) and not withdrawn as permitted
by "The Tender Offer -- Section 4. Withdrawal Rights." The term "Expiration
Date" means 12:00 midnight, New York City time, on Friday ______________,
1998, unless and until the Company, in its sole discretion shall have
extended the period during which the Offer is open, in which event the term
"Expiration Date" shall mean the latest time and date at which the Offer, as
so extended by the Company, shall expire.
The Company expressly reserves the right, in its sole discretion, at any
time and from time to time, to extend for any reason the period of time during
which the Offer is open, including the occurrence of any of the conditions
specified in "The Tender Offer -- Section 11. Certain Conditions of the Offer,"
by giving oral or written notice of such extension to the Depositary. During
any such extension, all Shares previously tendered and not withdrawn will remain
subject to the Offer, subject to the rights of a tendering shareholder to
withdraw such shareholder's Shares. See "The Tender Offer -- Section 4.
Withdrawal Rights."
Subject to the applicable regulations of the Commission, the Company also
expressly reserves the right, in its sole discretion, at any time and from time
to time, (i) to delay acceptance for payment of, or, regardless of whether such
Shares were theretofore accepted for payment, payment for, any Shares, pending
receipt of any regulatory approval specified in "The Tender Offer -- Section 12.
Certain Legal Matters and Regulatory Approvals," (ii) to terminate the Offer and
not accept for payment any Shares upon the occurrence of any of the conditions
specified in "The Tender Offer -- Section 11. Certain Conditions of the Offer"
and (iii) to waive any condition or otherwise amend the Offer in any respect, by
giving oral or written notice of such delay, termination, waiver or amendment to
the Depositary and by making a public announcement thereof. The Company
acknowledges that (i) Rule 13e-4(f) under the Exchange Act requires the Company
to pay the consideration offered or return the Shares tendered promptly after
the termination or withdrawal of the Offer and (ii) the Company may not delay
acceptance for payment of, or payment for (except as provided in clause (i) of
the first sentence of this paragraph), any Shares upon the occurrence of any of
the conditions specified in "The Tender Offer -- Section 11. Certain Conditions
of the Offer" without extending the period of time during which the Offer is
open.
Any such extension, delay, termination, waiver or amendment will be
followed as promptly as practicable by public announcement thereof, such
announcement in the case of an extension to be made no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date. Subject to applicable law (including Rules 13e-3(e)(2),
13e-4(e)(2) and 13e-4(f) under the Exchange Act, which require that material
changes be promptly disseminated to shareholders in a manner reasonably
designed to inform them of such changes) and without limiting the manner in
which the Company may choose to make any public announcement, the Company shall
have no obligation to publish, advertise or otherwise communicate any such
public announcement other than by issuing a press release to the Dow Jones News
Service.
16
<PAGE>
If the Company makes a material change in the terms of the Offer or other
information concerning the Offer, or if it waives a material condition of the
Offer, the Company will extend the Offer to the extent required by Rules
13e-3(e)(2), 13e-4(e)(2) and 13e-4(f) under the Exchange Act.
If, prior to the Expiration Date, the Company should decide to decrease the
number of Shares being sought or to increase or decrease the consideration being
offered in the Offer, such decrease in the number of Shares being sought or such
increase or decrease in the consideration being offered will be applicable to
all shareholders whose Shares are accepted for payment pursuant to the Offer
and, if at the time notice of any such decrease in the number of Shares being
sought or such increase or decrease in the consideration being offered is first
published, sent or given to holders of such Shares, the Offer is scheduled to
expire at any time earlier than the period ending on the tenth (10th) business
day from and including the date that such notice is first so published, sent or
given, the Offer will be extended at least until the expiration of such ten (10)
business day period. For purposes of this Offer, a "business day" means any day
other than a Saturday, Sunday or federal holiday and consists of the time period
from 12:01 a.m. through 12:00 midnight, New York City time.
This Offer to Purchase and the related Letter of Transmittal will be mailed
to record holders of Shares whose names appear on the Company's shareholder list
and will be furnished, for subsequent transmittal to beneficial owners of
Shares, to brokers, dealers, commercial banks, trust companies and similar
persons whose names, or the names of whose nominees, appear on the shareholder
list or, if applicable, who are listed as participants in a clearing agency's
security position listing.
2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES. Upon the terms and
subject to the conditions of the Offer (including, if the Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
Company will accept for payment, and will pay for promptly after the
Expiration Date, all Shares validly tendered prior to the Expiration Date and
not properly withdrawn in accordance with "The Tender Offer -- Section 11.
Certain Conditions of the Offer." Subject to applicable rules of the
Commission, the Company expressly reserves the right to delay acceptance for
payment of, or payment for, Shares pending receipt of any regulatory
approvals specified in "The Tender Offer -- Section 12. Certain Legal
Matters and Regulatory Approvals" or in order to comply in whole or in part
with any other applicable law.
In all cases, payment for Shares tendered and accepted for payment pursuant
to the Offer will be made only after timely receipt by the Depositary of (i) the
certificates evidencing such Shares (the "Share Certificates") or timely
confirmation (a "Book-Entry Confirmation") of a book-entry transfer of such
Shares into the Depositary's account at The Depository Trust Company or the
Philadelphia Depository Trust Company (each, a "Book-Entry Transfer Facility"
and, collectively, the "Book-Entry Transfer Facilities") pursuant to the
procedures set forth in "The Tender Offer -- Section 3. Procedures for
Accepting the Offer and Tendering Shares," (ii) the Letter of Transmittal (or a
facsimile thereof), properly completed and duly executed, with any required
signature guarantees or, in the case of a book-entry transfer, an Agent's
Message (as defined below) in lieu of the Letter of Transmittal and (iii) any
other documents required under the Letter of Transmittal.
17
<PAGE>
For purposes of the Offer, the Company will be deemed to have accepted for
payment (and thereby purchased) Shares validly tendered and not properly
withdrawn as, if and when the Company gives oral or written notice to the
Depositary of the Company's acceptance for payment of such Shares pursuant to
the Offer. Upon the terms and subject to the conditions of the Offer, payment
for Shares accepted for payment pursuant to the Offer will be made by deposit of
the purchase price therefor with the Depositary, which will act as agent for
tendering shareholders for the purpose of receiving payments from the Company
and transmitting such payments to tendering shareholders whose Shares have been
accepted for payment. Under no circumstances will interest on the purchase
price for Shares be paid, regardless of any delay in making such payment.
If any tendered Shares are not accepted for payment for any reason pursuant
to the terms and conditions of the Offer, or if Share Certificates are submitted
evidencing more Shares than are tendered, Share Certificates evidencing
unpurchased Shares will be returned, without expense to the tendering
shareholder (or, in the case of Shares tendered by book-entry transfer into the
Depositary's account at a Book-Entry Transfer Facility pursuant to the procedure
set forth in "The Tender Offer -- Section 3. Procedures for Accepting the Offer
and Tendering Shares," such Shares will be credited to an account maintained at
such Book-Entry Transfer Facility), as promptly as practicable following the
expiration or termination of the Offer.
If, prior to the Expiration Date, the Company shall increase the
consideration offered to any holders of Shares pursuant to the Offer, such
increased consideration will be paid to all holders of Shares that are purchased
pursuant to the Offer, whether or not, such Shares were tendered prior to such
increase in consideration.
The Company reserves the right to transfer or assign, in whole or from time
to time in part, to one or more of its affiliates, the right to purchase all or
any portion of the Shares tendered pursuant to the Offer, but any such transfer
or assignment will not relieve the Company of its obligations under the Offer
and will in no way prejudice the rights of tendering shareholders to receive
payment for Shares validly tendered and accepted for payment pursuant to the
Offer.
3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES. In order for
a holder of Shares validly to tender Shares pursuant to the Offer, the Letter of
Transmittal (or a facsimile thereof), properly completed and duly executed,
together with any required signature guarantees (or, in the case of a book-entry
transfer, an Agent's Message (as defined below) in lieu of the Letter of
Transmittal) and any other documents required by the Letter of Transmittal, must
be received by the Depositary at one of its addresses set forth on the back
cover of this Offer to Purchase and either (i) the Share Certificates evidencing
tendered Shares must be received by the Depositary at such address or such
Shares must be tendered pursuant to the procedure for book-entry transfer
described below and a Book-Entry Confirmation must be received by the Depositary
(including an Agent's Message if the tendering shareholder has not delivered a
Letter of Transmittal), in each case prior to the Expiration Date, or (ii) the
tendering shareholder must comply with the guaranteed delivery procedures
described below. The term "Agent's Message" means a message, transmitted by a
Book-Entry Transfer Facility to, and received by, the Depositary and forming a
part of a Book-Entry Confirmation, which states that such Book-Entry Transfer
Facility has received an express acknowledgment from the participant in such
book-entry
18
<PAGE>
confirmation, that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal and that the Company may enforce such
agreement against such participant.
THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED
DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT
THE OPTION AND RISK OF THE TENDERING SHAREHOLDER, AND THE DELIVERY WILL BE
DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY
MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS
RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY
DELIVERY.
BOOK-ENTRY TRANSFER. The Depositary will establish accounts with respect
to the Shares at the Book-Entry Transfer Facilities for purposes of the Offer
within two business days after the date of this Offer to Purchase. Any
financial institution that is a participant in the system of Book-Entry Transfer
Facility may make a book-entry delivery of Shares by causing such Book-Entry
Transfer Facility to transfer such Shares into the Depositary's account at such
Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for such transfer. However, although delivery of Shares
may be effected through book-entry transfer at a Book-Entry Transfer Facility,
either the Letter of Transmittal (or a facsimile thereof), properly completed
and duly executed, together with any required signature guarantees, or an
Agent's Message in lieu of the Letter of Transmittal, and any other required
documents, must, in any case, be received by the Depositary at one of its
addresses set forth on the back cover of this Offer to Purchase prior to the
Expiration Date, or the tendering shareholder must comply with the guaranteed
delivery procedure described below. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY
TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY.
SIGNATURE GUARANTEES. Signatures on all Letters of Transmittal must be
guaranteed by a firm that is a member of the Medallion Signature Guarantee
Program, or by any other "eligible guarantor institution," as such term is
defined in Rule 17Ad-15 under the Exchange Act (each of the foregoing referred
to as an "Eligible Institution"), except in cases where Shares are tendered
(i) by a registered holder of Shares who has not completed either the box
entitled "Special Payment Instructions" or the box entitled "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution. If a Share Certificate is registered in the name of a
person other than the signer of the Letter of Transmittal, or if payment is to
be returned, to a person other than the registered holder(s), then the Share
Certificate must be endorsed or accompanied by appropriate stock powers, in
either case signed exactly as the name(s) of the registered holder(s) appear on
the Share Certificate, with the signature(s) on such Share Certificate or stock
powers guaranteed by an Eligible Institution. See Instructions 1 and 5 of the
Letter of Transmittal.
GUARANTEED DELIVERY. If a shareholder desires to tender Shares pursuant to
the Offer and the Share Certificates evidencing such shareholder's Shares are
not immediately available or such shareholder cannot deliver the Share
Certificates and all other required documents to the Depositary prior to the
Expiration Date, or such shareholder cannot complete the procedure for delivery
by book-entry transfer on a timely basis, such Shares may nevertheless be
tendered, provided that all the following conditions are satisfied:
19
<PAGE>
i. such tender is made by or through an Eligible Institution;
ii. a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form made available by the Company is
received prior to the Expiration Date by the Depositary as provided below;
and
iii. the Share Certificates (or a Book-Entry Confirmation) evidencing
all tendered Shares, in proper form for transfer, in each case together
with the Letter of Transmittal (or a facsimile thereof), properly completed
and duly executed, with any required signature guarantees, and any other
documents required by the Letter of Transmittal are received by the
Depositary within three Nasdaq trading days after the date of execution of
such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand or mail or
transmitted by telegram or facsimile transmission to the Depositary and must
include a guarantee by an Eligible Institution in the form set forth in the form
of Notice of Guaranteed Delivery made available by the Company.
In all cases, payment for Shares tendered and accepted for payment pursuant
to the Offer will be made only after timely receipt by the Depositary of the
Share Certificates evidencing such Shares, or a Book-Entry Confirmation of the
delivery of such Shares, and the Letter of Transmittal (or a facsimile thereof),
properly completed and duly executed, with any required signature guarantees,
and any other documents required by the Letter of Transmittal.
DETERMINATION OF VALIDITY. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance for payment of any tender
of Shares will be determined by the Company in its sole discretion, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance for payment of which may, in the opinion of its
counsel, be unlawful. The Company also reserves the absolute right to waive any
condition of the Offer or any defect or irregularity in the tender of any Shares
of any particular shareholder, whether or not similar defects or irregularities
are waived in the case of other shareholders. No tender of Shares will be
deemed to have been validly made until all defects and irregularities have been
cured or waived. None of the Company, the Depositary, the Information Agent or
any other person will be under any duty to give notification of any defects or
irregularities in tenders or incur any liability for failure to give any such
notification. The Company's interpretation of the terms and conditions of the
Offer (including the Letter of Transmittal and the instructions thereto) will
be final and binding.
OTHER REQUIREMENTS. By executing the Letter of Transmittal as set forth
above, a tendering shareholder irrevocably appoints designees of the Company as
such shareholder's proxies, each with full power of substitution, in the manner
set forth in the Letter of Transmittal, to the full extent of such shareholder's
rights with respect to the Shares tendered by such shareholder and accepted for
payment by the Company (and with respect to any and all Shares or other
securities issued or issuable in respect of such Shares on or after ___________,
1998). All such proxies shall be considered coupled with an interest in the
tendered Shares. Such appointment will be effective
20
<PAGE>
when, and only to the extent that, the Company accepts such Shares for payment.
Upon such acceptance for payment, all prior proxies given by such shareholder
with respect to such Shares (and such other Shares and securities) will be
revoked without further action, and no subsequent proxies may be given nor any
subsequent written consent executed by such shareholder (and, if given or
executed, will not be deemed to be effective) with respect thereto. The
designees of the Company will, with respect to the Shares for which the
appointment is effective, be empowered to exercise all voting and other rights
of such shareholder as they in their sole discretion may deem proper at any
annual or special meeting of the Company's shareholders or any adjournment or
postponement thereof, by written consent in lieu of any such meeting or
otherwise.
The acceptance for payment by the Company of Shares pursuant to any of the
procedures described above will constitute a binding agreement between the
tendering shareholder and the Company upon the terms and subject to the
conditions of the Offer.
TO PREVENT BACKUP FEDERAL INCOME TAX WITHHOLDING WITH RESPECT TO PAYMENT TO
CERTAIN SHAREHOLDERS OF THE PURCHASE PRICE OF SHARES PURCHASED PURSUANT TO THE
OFFER, EACH SUCH SHAREHOLDER MUST PROVIDE THE DEPOSITARY WITH SUCH SHAREHOLDER'S
CORRECT TAXPAYER IDENTIFICATION NUMBER AND CERTIFY THAT SUCH SHAREHOLDER IS NOT
SUBJECT TO BACKUP FEDERAL INCOME TAX WITHHOLDING BY COMPLETING THE SUBSTITUTE
FORM W-9 IN THE LETTER OF TRANSMITTAL. IF BACKUP WITHHOLDING APPLIES WITH
RESPECT TO A SHAREHOLDER, THE DEPOSITARY IS REQUIRED TO WITHHOLD 31% OF ANY
PAYMENTS MADE TO SUCH SHAREHOLDER. SEE INSTRUCTION 9 OF THE LETTER OF
TRANSMITTAL.
4. WITHDRAWAL RIGHTS. Tenders of Shares made pursuant to the Offer are
irrevocable except that such Shares may be withdrawn at any time prior to the
Expiration Date and, unless theretofore accepted for payment by the Company
pursuant to the Offer, may also be withdrawn at any time after
__________________, 1998. If the Company extends the Offer, is delayed in its
acceptance for payment of Shares or is unable to accept Shares for payment
pursuant to the Offer, the Depositary may, nevertheless, on behalf of the
Company, retain tendered Shares, and such Shares may not be withdrawn except to
the extent that tendering shareholders are entitled to withdrawal rights as
described in this Section 4.
For a withdrawal to be effective, a written, telegraphic or facsimile
transmission notice of withdrawal must be timely received by the Depositary at
one of its addresses set forth on the back cover page of this Offer to Purchase.
Any such notice of withdrawal must specify the name of the person who tendered
the Shares to be withdrawn, the number of Shares to be withdrawn and the name of
the registered holder of such Shares, if different from that of the person who
tendered such Shares. If Share Certificates evidencing Shares to be withdrawn
have been delivered or otherwise identified to the Depositary, then, prior to
the physical release of such Share Certificates, the serial numbers shown on
such Share Certificates must be submitted to the Depositary and the signature(s)
on the notice of withdrawal must be guaranteed by an Eligible Institution,
unless such Shares have been tendered for the account of an Eligible
Institution. If Shares have been tendered pursuant to the procedure for
book-entry transfer as set forth in the "The Tender Offer -- Section 3.
Procedures for
21
<PAGE>
Accepting the Offer and Tendering Shares," any notice of withdrawal must specify
the name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawn Shares.
All questions as to the form and validity (including the time of receipt)
or any notice of withdrawal will be determined by the Company, in its sole
discretion, whose determination will be final and binding. None of the Company,
the Information Agent or any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal or
incur any liability for failure to give any such notification.
Any Shares properly withdrawn will thereafter be deemed not to have been
validly tendered for purposes of the Offer. However, withdrawn Shares may be
re-tendered at any time prior to the Expiration Date by following one of the
procedures described in "The Tender Offer -- Section 3. Procedures for
Accepting the Offer and Tendering Shares."
5. CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The receipt of cash for
Shares pursuant to the Offer will be a taxable transaction for federal income
tax purposes and may also be a taxable transaction under applicable state, local
or foreign tax laws. In general, a shareholder will recognize gain or loss for
federal income tax purposes equal to the difference between the amount of cash
received in exchange for the Shares sold and such shareholder's adjusted tax
basis in such Shares. Assuming the Shares constitute capital assets in the
hands of the shareholder, such gain or loss will be a capital gain or loss and
will be long-term capital gain or loss if the holder will have held the Shares
for more than eighteen months at the time of the sale. Gain or loss will be
calculated separately for each block of Shares tendered pursuant to the Offer.
In general, in order to prevent backup federal income tax withholding at a
rate of 31% on the cash consideration to be received in the Offer, each
shareholder who is not otherwise exempt from such requirements must provide such
holder's correct taxpayer identification number (and certain other information)
by completing the Substitute Form W-9 in the Letter of Transmittal.
THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO CERTAIN TYPES OF
SHAREHOLDERS, INCLUDING BROKER-DEALERS, SHAREHOLDERS WHO ACQUIRED SHARES
PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION,
INDIVIDUALS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES AND FOREIGN
CORPORATIONS.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH IS INCLUDED FOR GENERAL
INFORMATION ONLY AND IS BASED UPON PRESENT LAW. SHAREHOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE
OFFER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF THE ALTERNATIVE MINIMUM
TAX, AND STATE, LOCAL AND FOREIGN TAX LAWS.
6. PRICE RANGE OF SHARES; DIVIDENDS. The Shares are listed and
principally traded on the OTCBB market under the ticker symbol "WDGF." The
following table sets forth the high and low bid and ask prices per Share
during the quarters indicated:
22
<PAGE>
<TABLE>
<CAPTION>
BID ASK
HIGH LOW HIGH LOW
YEAR ENDED DECEMBER 31, 1996:
- -----------------------------
<S> <C> <C> <C> <C>
First Quarter . . . . . . . . $ .24 . . $ .20 $ .37 . . . . . $ .28
Second Quarter. . . . . . . . $ .60 . . $ .22 $ .68 . . . . . $ .28
Third Quarter . . . . . . . . $ .60 . . $ .35 $ .67 . . . . . $ .44
Fourth Quarter. . . . . . . . $ .45 . . $ .31 $ .54 . . . . . $ .42
<CAPTION>
YEAR ENDED DECEMBER 31, 1997:
- -----------------------------
<S> <C> <C> <C> <C>
First Quarter . . . . . . . . $ 0.37 . . $ 0.32 $ 0.47 . . . . $ 0.40
Second Quarter. . . . . . . . $ 0.32 . . $ 0.26 $ 0.42 . . . . $ 0.30
Third Quarter . . . . . . . . $ 0.27 . . $ 0.27 $ 0.34 . . . . $ 0.32
Fourth Quarter. . . . . . . . $ 0.50 . . $ 0.20 $ 0.59 . . . . $ 0.34
<CAPTION>
YEAR ENDED DECEMBER 31, 1998:
- -----------------------------
<S> <C> <C> <C> <C>
First Quarter . . . . . . . . $ 0.59 . . $ 0.21 $ 0.62 . . . . $ 0.35
</TABLE>
The foregoing figures, which were obtained from Nasdaq monthly statistical
reports, do not reflect retail markups or markdowns and may not represent actual
trades. As of February 16, 1998, the SBI was held by approximately 3,000
stockholders of record. The Company has not paid any dividends in the last
five years and has no future plans to do so. The Company currently intends to
retain any future earnings for the development of its business.
On February 6, 1998, the last full trading day prior to the announcement of
the Offer, the closing price per Share as reported on the OTCBB was $0.35 per
share.
There were no dividends declared or paid by the Company on the SBI for the
years ended December 31, 1991 through 1997. The Company presently intends to
retain all earnings in connection with its business. Payments 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.
STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION
FOR THE SHARES.
7. CERTAIN INFORMATION CONCERNING THE COMPANY. Except as otherwise set
forth herein, the information concerning the Company contained in this Offer to
Purchase, including financial information, has been furnished by the Company.
GENERAL. The Company is a Massachusetts business trust with its principal
executive offices located at 5200 N. Irwindale Avenue, Suite 168, Irwindale,
California 91706. The Company designs, manufacturers and markets certain
accessories for light duty trucks such as bumpers, grille guards, push bars and
step rails principally under the names Fey, Tuff Bar and Westin.
23
<PAGE>
FINANCIAL INFORMATION. Set forth below is certain selected financial
information relating to the Company which has been excerpted or derived from the
audited financial statements contained in the Company's Annual Reports on Form
10-K for the year ended December 31, 1997 (the "Form 10-K"). More comprehensive
financial information is included in the Form 10-K (including management's
discussion and analysis of results of operations and financial position) and
other documents filed by the Company with the Commission. The financial
information that follows is qualified in its entirety by reference to such
reports and other documents, including the financial statements and related
notes contained therein. Such reports and other documents may be examined and
copies may be obtained from the offices of the Commission in the manner set
forth below. In addition, Schedule IV attached hereto sets forth the Company's
Form 10-K, including the audited financial statements for the year ended
December 31, 1997.
SUMMARY FINANCIAL AND OPERATING DATA
($ in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INCOME STATEMENT:
Sales . . . . . . . . . . . . . . . . . $52,387 $46,286 $46,112
Net income. . . . . . . . . . . . . . . $ 2,946 $ 1,372 $ 1,845
. . . . . . . . . . . . . . . . . . . .
Balance Sheet (at end of period):
Working capital . . . . . . . . . . . . $ 8,511 $ 5,324 $ 4,188
Total assets. . . . . . . . . . . . . . $22,543 $20,350 $21,398
Shareholders' equity. . . . . . . . . . $ 8,293 $ 7,119 $ 5,747
. . . . . . . . . . . . . . . . . . . .
Per Share(1):. . . . . . . . . . . . . . . .
Net income per share-basic and diluted. $ .13 $ .06 $ .08
</TABLE>
__________________________
(1) The average number of shares outstanding (basic and diluted) during 1997
and 1996 was 21,885,668 and the average number of shares outstanding
(basic and diluted) during 1995 was 21,764,280.
RATIO OF EARNINGS TO FIXED CHARGES; BOOK VALUE PER SHARE. The ratio of
earnings to fixed charges for the years ended December 31, 1997, 1996 and 1995,
was 2.83 to 1, 1.56 to 1 and 1.33 to 1, respectively. The book value per share
was $0.38 at December 31, 1997 and $0.33 at December 31, 1996.
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS. The following
unaudited pro forma condensed financial information and explanatory notes give
effect to the Offer and are based on the estimates and assumptions set forth in
the notes to such statements. This pro forma information has been prepared
using the historical financial statements of the
24
<PAGE>
Company and should be read in conjunction with the historical financial
statements and notes thereto included elsewhere in this Offer to Purchase.
The pro forma condensed balance sheet information gives effect to the
Offer as if it had occurred on December 31, 1997. The pro forma condensed
income statement for the year ended December 31, 1997 gives effect to the
Offer as if it had occurred on January 1, 1997. The pro forma condensed
financial data may not be indicative of actual results that would have been
achieved if the Offer had occurred on the date indicated or the results that
may be realized in the future.
25
<PAGE>
WEDGESTONE FINANCIAL
PRO FORMA BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 902 ($ 877)(a) $ 25
Accounts and other receivable, net. . . . . . . . . . . 8,751 8751
Inventories . . . . . . . . . . . . . . . . . . . . . . 5,983 5,983
Other current assets. . . . . . . . . . . . . . . . . . 1,761 1,761
-------- --------
Total current assets. . . . . . . . . . . . . . . 17,397 16,520
Property, plant and equipment, net . . . . . . . . . . . . . 3,342 3,342
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 1,804 $ 130 (b) 1,934
-------- --------
Total assets. . . . . . . . . . . . . . . . . . . $ 22,543 $ 21,796
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities: . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . $ 2,194 $4,146 (a) $ 6,340
Accounts payable. . . . . . . . . . . . . . . . . . . . 4,488 4,488
Accrued Expenses. . . . . . . . . . . . . . . . . . . . 2,204 2,204
-------- --------
Total current liabilities. . . . . . . . . . . . . 8,886 13,032
Long-term debt, less current portion . . . . . . . . . . . . 5,364 959 (a) 6,323
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . 14,250 19,355
-------- --------
Shareholders' equity:
Common stock. . . . . . . . . . . . . . . . . . . . . . 21,886 (8,246)(a) 13,640
Additional paid-in-capital. . . . . . . . . . . . . . . 31,396 2,394 (a) 33,790
Note receivable from Shareholder. . . . . . . . . . . . (1,772) (1,772)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . (43,217) (43,217)
-------- --------
Total shareholders' equity . . . . . . . . . . . . 8,293 2,441
-------- --------
Total liabilities and shareholders' equity . . . . $ 22,543 $ 21,796
-------- --------
-------- --------
</TABLE>
See Notes to unaudited pro forma financial statements.
26
<PAGE>
WEDGESTONE FINANCIAL
PRO FORMA INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Sales. . . . . . . . . . . . . . . . . . . . . . . $52,387 $52,387
Cost of sales. . . . . . . . . . . . . . . . . . . 34,128 34,128
------- -------
Gross profit. . . . . . . . . . . . . . . . . 18,259 18,259
Selling, general and administrative expenses . . . 14,036 $(127)(d) 13,909
------- -------
Income from operations. . . . . . . . . . . . 4,223 4,350
Other income (expense):
Interest expense. . . . . . . . . . . . . . . 836 584 (c) 1,420
Other, net. . . . . . . . . . . . . . . . . . (374) (374)
------- -------
Income before provision for income taxes 3,761 3,304
Provision for income taxes:. . . . . . . . . . . .
Federal. . . . . . . . . . . . . . . . . 525 (141)(e) 384
State. . . . . . . . . . . . . . . . . . 290 (41)(e) 249
------- -------
Net income . . . . . . . . . . . . . . . . . . . . $ 2,946 $ 2,671
------- -------
------- -------
Net income per share-basic and diluted . . . . . . $ .13 $ .19
------- -------
------- -------
Weighted average number of SBI outstanding . . . . 21,886 13,647
------- -------
------- -------
</TABLE>
See Notes to unaudited pro forma financial statements.
27
<PAGE>
WEDGESTONE FINANCIAL
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(a) Purchase of Public Shareholders' shares to be financed from bank loan
proceeds:
<TABLE>
<S> <C>
Shares held by public shareholders. . . . . 8,246,484
Times $.67 per share. . . . . . . . . . . . X .67
----------
Total Price . . . . . . . . . . . . . . . . $ 5,525,000
Estimated expenses. . . . . . . . . . . . . 327,000
Bank loan fees. . . . . . . . . . . . . . . 130,000
Less cash to be used. . . . . . . . . . . . (877,000)
----------
Total loan proceeds . . . . . . . . . . . . $ 5,105,000
Less current portion. . . . . . . . . . . . (4,146,000)
----------
Long-term debt. . . . . . . . . . . . . . . $ 959,000
----------
----------
</TABLE>
(b) Bank loan fees based on 1% of total facility and are amortized over 18
months.
(c) Interest expense at 9.75% plus amortization of loan fees.
(d) Elimination of ongoing costs incurred as a result of being a public
reporting Company.
(e) Tax effect of (c) and (d) above.
28
<PAGE>
The Company is subject to the informational filing requirements of the
Exchange Act and, in accordance therewith, is required to file periodic reports,
proxy statements and other information with the Commission relating to its
business, financial condition and other matters. Information as of particular
dates concerning the Company's directors and officers, their remuneration, stock
options granted to them, the principal holders of the Company's securities and
any material interest of such persons in transactions with the Company is
required to be disclosed in proxy statements distributed to the Company's
stockholders and filed with the Commission. Such reports, proxy statements and
other information should be available for inspection at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and also should be available for inspection at the
Commission's regional offices located at Seven World Trade Center, 13th Floor,
New York, New York 10048 and the Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may also be obtained by
mail, upon payment of the Commission's customary fees, by writing to its
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. These
materials filed by the Company with the Commission are also available at the web
site of the Commission at "http:"www.sec.gov". The information should also be
available for inspection at the National Association of Securities Dealers,
Inc., 1735 K Street N.W., Washington, D.C. 20006.
8. FINANCING OF THE OFFER AND THE MERGER. The total amount of funds
required by the Company to consummate the Offer and the Merger (if necessary),
and to pay related fees and expenses is estimated to be approximately $6.1
million. The Company will ensure that it has sufficient cash to acquire all the
Shares from the Public Shareholders through, (i) additional advances on its
existing revolving credit agreement with its primary lender, The CIT
Group/Credit Finance, Inc. ("CIT") totaling $3,123,000, (ii) proceeds from the
reload of the Company's equipment term loans with CIT totaling $568,000, (iii)
an 18 month term loan totaling $1,500,000 and, (iv) cash on hand totaling
$877,000. The loans will bear interest at the rate of prime plus 1.375%
(currently aggregating 9.75%) and are between the Company's wholly owned
subsidiary Wedgestone Automotive Corp, as borrower and CIT, as lender. Each of
these loans are governed by loan agreements (the "CIT Agreements"), which
includes a revolving promissory note in the principal amount of $10,000,000 for
working capital purposes. These loans are secured by the equipment, accounts
receivable, inventory and all other tangible and intangible assets of the
Company and its subsidiaries.
Additional material terms of the CIT Agreements are (i) clearance to
proceed with the Offer from the Securities and Exchange Commission by
affirmation of no further comments, and (ii) the usual and customary affirmative
and negative covenants related to the Company's financial condition.
The Company plans to repay such borrowings from funds generated by
operations and does not anticipate any refinancing of the debt incurred in
connection with the Offer or the Merger, if necessary. However, it is
anticipated that the CIT Agreements may be extended, refinanced, renewed,
increased or amended in the future, but the Company currently has no plans to do
so.
9. DIVIDENDS AND DISTRIBUTIONS. If, on or after ____________________,
1998, the Company should declare or pay any dividend on the Shares or make any
other distribution (including the issuance of additional shares of capital stock
pursuant to a stock dividend or stock split, the
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issuance of other securities or the issuance of rights for the purchase of any
securities) with respect to the Shares that is payable or distributable to
shareholders of record on a date prior to the transfer to the name of the
Company on the Company's stock transfer records of the Shares purchased pursuant
to the Offer, then, without prejudice to the Company's rights under "The Tender
Offer -- Section 11. Certain Conditions of the Offer," (i) the purchase price
per Share payable by the Company pursuant to the Offer will be reduced to the
extent any such dividend or distribution is payable in cash; and (ii) any
non-cash dividend, distribution or right shall be received and held by the
tendering shareholder for the account of the Company and will be required to be
promptly remitted and transferred by each tendering shareholder to the
Depositary for the account of the Company, accompanied by appropriate
documentation of transfer.
10. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES; QUOTATION AND
EXCHANGE ACT REGISTRATION. The purchase of Shares by the Company pursuant to
the Offer will reduce the number of Shares that might otherwise trade
publicly and will reduce the number of holders of Shares, which could
adversely affect the liquidity and market value of the remaining Shares held
by the public.
The Company intends to cause the Shares not to be listed for quotation
on the OTCBB following the consummation of the Offer, and if necessary, the
Merger.
The Shares are not currently "margin securities", as such term is defined
under the rules of the Board of Governors of the Federal Reserve System, which
has the effect, among other things, of not allowing brokers to extend credit on
the collateral of such securities.
The Shares are currently registered under the Exchange Act. Such
registration will be terminated upon application by the Company to the
Commission if the Shares are not listed on a national securities exchange and
there are fewer than 300 record holders. The termination of the registration of
the Shares under the Exchange Act would substantially reduce the information
required to be furnished by the Company to holders of Shares and to the
Commission and would make certain provisions of the Exchange Act, such as the
short-swing profit recovery provisions of Section 16(b), the requirement of
furnishing a proxy statement in connection with shareholders' meetings and the
requirements of Rule 13e-3 under the Exchange Act with respect to "going
private" transactions, no longer applicable to the Shares. In addition,
"affiliates" of the Company and persons holding "restricted securities" of the
Company may be deprived of the ability to dispose of such securities pursuant
to Rule 144 promulgated under the Securities Act of 1933, as amended. The
Company currently intends to terminate the registration of the Shares under the
Exchange Act as soon after consummation of the Offer as the requirements for
termination of registration are met. If such requirements are not met after the
consummation of the Offer, the Company intends to ensure that the requirements
for termination of registration are met by effecting the Merger.
11. CERTAIN CONDITIONS OF THE OFFER. Notwithstanding any other provision
of the Offer, the Company shall not be required to accept for payment or pay for
any Shares tendered pursuant to the Offer, and may terminate or amend the Offer
and may postpone the acceptance for payment of, and payment for, Shares
tendered, if prior to the Expiration Date, any of the following
conditions exist:
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a. an order shall have been entered in any action or proceeding
before any federal or state court or governmental agency or other
regulatory body or a permanent injunction by any federal or state court of
competent jurisdiction in the United States shall have been issued and
remain in effect making illegal the purchase of, or payment for, any Shares
by the Company;
b. there shall have been any federal or state statute, rule or
regulation enacted or promulgated on or after the date of the Offer that
could reasonably be expected to result, directly or indirectly, in any of
the consequences referred to in paragraph (a) above;
c. there shall have occurred and be remaining in effect (i) any
general suspension of, or limitation on prices for, trading in securities
of the Company on NASDAQ, (ii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States, (iii) a
commencement of a war or armed hostilities or other national or
international calamity, directly or indirectly, involving the United States
or (iv) in the case of any of the foregoing existing on the date hereof, a
material acceleration or worsening thereof;
d. the Company (with the approval of a majority of the Independent
Committee) shall have agreed that the Company shall terminate the Offer or
postpone the acceptance for payment of or payment for Shares thereunder;
which, in the reasonable judgment of the Company in any such case, and
regardless of the circumstances giving rise to any such condition, makes it
inadvisable to proceed with such acceptance for payment or payment.
The foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
any such condition or may be waived by the Company in whole or in part at any
time and from time to time in its sole discretion. The failure by the Company
at any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right; the waiver of any such right with respect to particular facts
and other circumstances shall not be deemed a waiver with respect to any other
facts and circumstances; and each such right shall be deemed an ongoing right
that may be asserted at any time and from time to time.
12. CERTAIN LEGAL MATTERS AND REGULATORY APPROVALS.
GENERAL. The Company is not aware of any license or other regulatory
permit that appears to be material to the business of the Company that might be
adversely affected by the acquisition of Shares by the Company pursuant to the
Offer or, except as set forth below, of any approval or other action by any
domestic (federal or state) or foreign governmental, administrative or
regulatory authority or agency which would be required prior to the acquisition
of Shares by the Company pursuant to the Offer. Should any such approval or
other action be required, it is the Company's present intention to seek such
approval or action. The Company does not currently intend, however, to delay
the purchase of Shares tendered pursuant to the Offer pending the outcome of any
such action or the receipt of any such approval (subject to the Company's right
to decline to purchase Shares if any of the conditions in "The Tender Offer --
Section 11. Certain Conditions of the Offer" shall have occurred). There can
be no assurance that any such approval or other action, if needed, would be
obtained without substantial conditions or that adverse consequences might not
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result to the business of the Company, or that certain parts of the businesses
of the Company, might not have to be disposed of or held separate or other
substantial conditions complied with in order to obtain such approval or other
action or in the event that such approval was not obtained or such other action
was not taken. The Company's obligation under the Offer to accept for payment
and pay for Shares is subject to certain conditions, including conditions
relating to the legal matters discussed in this Section 12. See "The Tender
Offer -- Section 11. Certain Conditions of the Offer."
STATE TAKEOVER LAWS. Chapter 110F of the Massachusetts General Laws
("Chapter 110F") prohibits a corporation with 200 or more stockholders from
engaging in a "Business Combination" (as defined in Chapter 110F) with an
"Interested Stockholder" (defined generally as a person who, together with
affiliates and associates, owns 5% or more of such corporation's outstanding
voting stock, or as an affiliate or associate of such corporation who, together
with affiliates and associates, owned 5% or more of such corporation's
outstanding voting stock, or as an affiliate or associate of such corporation
who, together with affiliates and associates, owned 5% or more of such
corporation's outstanding voting stock at any time within the immediately
preceding three-year period) for three years following the date such person
became an Interested Stockholder. The provisions are not applicable when
(i) prior to the date the stockholder became an Interested Stockholder, the
board of directors of the corporation approved either the Business Combination
or the transaction that resulted in the stockholder becoming an Interested
Stockholder, (ii) upon consummation of the transaction that resulted in the
stockholder becoming an Interested Stockholder, such Interested Stockholder
owned at least 90% of the outstanding voting stock of the corporation, not
including shares owned by directors who are also officers and by certain
employee stock plans, or (iii) on or subsequent to the date the stockholder
becomes an Interested Stockholder, the Business Combination is approved by the
board of directors of the corporation and authorized at a meeting of
stockholders, and not by written consent, by the affirmative vote of the holders
of least two-thirds of the outstanding voting stock entitled to vote thereon,
excluding shares owned by the Interested Stockholder. These restrictions
generally do not apply to Business Combinations with an Interested Stockholder
that are proposed subsequent to the public announcement of, and prior to the
consummation or abandonment of, certain mergers, sales of a majority of a
corporation's assets or tender offers for 50% or more of the corporation's
voting stock. Based on the foregoing, the restrictions of Chapter 110F will not
apply to the Offer and Merger. Chapter 110F allows corporations to elect not to
be subject to the preceding provisions of Massachusetts law. The Company has
not so elected.
ANTITRUST. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
and the rules that have been promulgated thereunder by the Federal Trade
Commission (the "FTC"), certain transactions may not be consummated unless
certain information has been furnished to the Antitrust Division of the
Department of Justice and the FTC and certain waiting period requirements have
been satisfied. The acquisition of Shares by the Company pursuant to the Offer,
however, is not subject to such requirements. See "The Tender Offer -- Section
2. Acceptance for Payment and Payment for Shares."
LITIGATION. To the best knowledge of the Company, no lawsuits have been
filed relating to the Offer or the Merger since February 9, 1998, the date of
the announcement by the Company that it proposed to acquire the Shares from the
Public Shareholders.
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13. FEES AND EXPENSES. Except as set forth below, the Company will not
pay any fees or commissions to any broker, dealer or other person for soliciting
tenders of Shares pursuant to the Offer.
The Company has retained Innisfree M&A Incorporated as the Information
Agent, and BankBoston N.A., as the Depositary, in connection with the Offer.
The Information Agent may contact holders of Shares by mail, telephone,
telecopy, telegraph and personal interview and may request banks, brokers,
dealers and other nominee stockholders to forward materials relating to the
Offer to beneficial owners.
As compensation for acting as Information Agent in connection with the
Offer, Innisfree M&A Incorporated will be paid an estimated fee of $12,000 and
will also be reimbursed for certain out-of-pocket expenses and may be
indemnified against certain liabilities and expenses in connection with the
Offer, including certain liabilities under the federal securities laws. The
Company will pay the Depositary a fee of $30,000 for its services in connection
with the Offer, plus reimbursement for out-of-pocket expenses, and will
indemnify the Depositary against certain liabilities and expenses in connection
therewith, including certain liabilities under federal securities laws.
Brokers, dealers, commercial banks and trust companies will be reimbursed by the
Company for customary handling and mailing expenses incurred by them in
forwarding material to their customers.
14. MISCELLANEOUS. The Company is not aware of any jurisdiction in which
the making of the Offer is prohibited by any administrative or judicial action
pursuant to any valid state statute. If the Company becomes aware of any valid
state statute prohibiting the making of the Offer or the acceptance of Shares
pursuant thereto, the Company will make a good faith effort to comply with any
such state statute. If, after such good faith effort, the Company cannot comply
with any such state statute, the Offer will not be made to (nor will tenders be
accepted from or on behalf of) the holders of Shares in such state. In any
jurisdiction where the securities, blue sky or other laws require the Offer to
be made by a licensed broker or dealer, the Offer shall be deemed to be made on
behalf of the Company by one or more registered brokers or dealers licensed
under the laws of such jurisdiction.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ON BEHALF OF THE COMPANY NOT CONTAINED IN THIS OFFER TO PURCHASE
OR IN THE LETTER OF TRANSMITTAL, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
Pursuant to Rule 13e-3 and Rule 13e-4 of the General Rules and Regulations
under the Exchange Act, the Company has filed with the Commission the
Schedule 13E-3 and the Schedule 13E-4 together with exhibits, furnishing
additional information with respect to the Offer and may file amendments
thereto. Such statements, including exhibits and any amendments thereto, which
furnish certain additional information with respect to the Offer, may be
inspected at, and copies may be obtained from, the same places and in the same
manner as set forth in "The Tender Offer -- Section 7. Certain Information
Concerning the Company" (except that they will not be available at the regional
offices of the Commission).
33
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WEDGESTONE FINANCIAL
April ___, 1998
34
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SCHEDULE I
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name, current business address,
citizenship and present principal occupation or employment, and material
occupations, positions, offices or employments and business addresses thereof
for the past five years of each director and executive officer of the Company.
Unless otherwise indicated, each such person is a citizen of the United States
of America.
John C. Shaw Mr. Shaw has served as Chairman of the Board
520 Madison Avenue of the Company since November 1992. Since
40th Floor 1983, Mr. Shaw has served as a Managing
New York, New York 10022 Director of Resource Holdings Ltd., a New
York based private merchant banking firm.
Mr. Shaw is a member of the Board of
Directors of National Capital Management
Corp., a publicly traded corporation with
specialty finance operations.
David L. Sharp Mr. Sharp has served as the President of the
5200 N. Irwindale Avenue Company since July 1997 and as Chief
Suite 168 Executive Officer of Wedgestone Automotive
Irwindale, California 91706 Corp. since the acquisition of the
Automotive Segment from Standun, Inc. on
November 18, 1994. Mr. Sharp has been with
Standun, Inc. 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 Mr. Lee has served as the Chief Financial
5200 N. Irwindale Avenue Officer of the Company since July 1997 and
Suite 168 as Chief Financial Officer, Treasurer and
Irwindale, California 91706 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
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.
<PAGE>
Jeffrey S. Goldstein Mr. Goldstein has served as the Chief
70 Cantiague Rock Road Financial Officer of Air Techniques, Inc.
Hicksville, New York 11802 since July 1997. From October 1992 to July
1997, Mr. Goldstein served as the President
of the Company and has served as a Trustee
since June 1992. Mr. Goldstein has served
as President of Rockaway 605 Corp. since
1989. 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.
Jeffrey A. Oberg Mr. Oberg has served as a Trustee of the
One Financial Center Company since October 1994. Mr. Oberg has
Suite 1600 served as a Managing Director with Furman
Boston, Massachusetts 02210 Selz since May 1997 and prior thereto 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 Mr. Doran has served as a Trustee of the
530 Atlanta Avenue Company since October 1994. For the past
Boston, Massachusetts 02210 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.
<PAGE>
SCHEDULE II
[COMMONWEALTH LETTERHEAD]
January 30, 1998
To the Special Committee of the Board of Directors
Wedgestone Financial
Irwindale Avenue, Suite #168
Irwindale, CA 91708
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of the Company (other than those defined as "Remaining
Shareholders" in the Company's Tender Offer ("the Offer," or "Offer")) of the
cash consideration to be received by such stockholders in the Company's Offer to
purchase shares of beneficial interest (the "Shares") at $.65 per share net to
the seller in cash from all such shareholders.
In connection with the preparation of this opinion, we have not been authorized
by either the Board or the Independent Special Committee of the Board to
solicit, nor have we solicited, third-party indications of interest with respect
to a business combination or other extraordinary transaction involving the
purchase of Wedgestone Financial or any of its subsidiaries or assets. As such,
we are not in a position to state or recommend that this Offer represents the
best possible or potential highest price offer. Rather, our opinion is limited
to whether this Offer at this time is fair from a financial point of view, to
the independent shareholders of the Company.
For purposes of the opinion set forth herein we have, INTER ALIA:
(i) reviewed certain publicly available historical financial and operating
data concerning the Company including the Annual Report to Stockholders
and Annual Report on Form 10-K for the year ended December 31, 1996 and
the Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997,
June 30, 1997, and September 30, 1997;
(ii) interviewed certain members of senior management of the Company to
discuss the prospects for the Company's business;
(iii) reviewed certain information of the Company, including financial
forecasts relating to the business, earnings, cash flow, assets and
prospects of the Company prepared by the management of the Company;
(iv) reviewed publicly available financial operating and stock market data
concerning certain companies engaged in businesses which the Company's
management deemed relatively comparable to the Company;
<PAGE>
Special Committee of the Board of Directors
January 30, 1998
Page 2
(v) inquired as to the financial terms of certain recent transactions
management deemed relevant to our inquiry;
(vi) reviewed the historical market prices and trading volumes of the
Company's Shares;
(vii) reviewed the relationship between the Company's Shares' historical market
prices and its reported earnings per share data; and
(viii) reviewed and conducted such other financial studies, analyses and
investigations we deemed appropriate.
We have, with your approval, assumed that the drafts of the Agreement and
Shareholders Agreement when executed in definitive form by the parties thereto
will conform in all material respects to the drafts of such agreements, which we
have reviewed.
In connection with our review and analysis and in arriving at our opinion, we
have relied upon the accuracy and completeness of the financial and other
information provided to us by the Company and its management team. We have not
assumed any responsibility for independent verification of such information.
With respect to the financial forecasts provided to us by the Company,
management has represented to us, and we have assumed that such forecasts (and
assumptions and bases therefor) have been prepared in good faith and represent
management's best currently available estimate as to the future financial
performance of the Company. We express no opinion with respect to such
projections, forecasts, and analyses or the assumptions upon which they are
based. We have not made any independent appraisal of the assets or liabilities
of the Company, and no such appraisal has been provided to us. Further, our
opinion is necessarily based on economic, financial, market and other conditions
as they exist and can be evaluated as of the date hereof.
This letter and the opinion expressed herein are for the use of the Special
Committee of Board of Directors of the Company. This opinion does not
constitute a recommendation to any stockholder of the Company with respect to
whether such stockholder should tender his or her Shares in the Offer and should
not be relied upon by any stockholder as such.
This opinion may not be reproduced, summarized, excerpted from or otherwise
publicly referred to or disclosed in any manner, without our prior written
consent, except that the Company may include this opinion in its entirety in any
disclosure document to be sent to the Company's stockholders or filed with the
Securities and Exchange Commission relating to the Offer.
<PAGE>
Special Committee of the Board of Directors
January 30, 1998
Page 3
Based upon and subject to the foregoing, including the various assumptions and
limitations set forth herein, we are of the opinion that, as of the date hereof,
the cash consideration of $.65 per share to be received by the shareholders of
the Company pursuant to the Offer to such stockholders is fair from a financial
point of view.
Sincerely,
Commonwealth Associates
<PAGE>
SCHEDULE III
RIGHTS OF DISSENTING STOCKHOLDERS UNDER THE MBCL
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF THE MBCL, ANY STOCKHOLDER WHO
IS CONSIDERING EXERCISING DISSENTERS' RIGHTS SHOULD CONSULT HIS OR HER LEGAL
ADVISOR.
STATUTORY APPRAISAL PROCEDURES. The following is a brief summary of the
statutory procedures to be followed by a holder of Shares at the Effective Time
who does not wish to accept the per Share cash consideration pursuant to the
Merger (a "Remaining Stockholder") in order to dissent from the Merger and
perfect appraisal rights under Massachusetts law. THIS SUMMARY IS NOT INTENDED
TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTIONS 85-98
OF THE MBCL, THE TEXT OF WHICH IS SET FORTH IN THIS ANNEX B HERETO. ANY
REMAINING STOCKHOLDER CONSIDERING DEMANDING APPRAISAL IS ADVISED TO CONSULT
LEGAL COUNSEL. APPRAISAL RIGHTS WILL NOT BE AVAILABLE UNLESS AND UNTIL THE
MERGER (OR A SIMILAR BUSINESS COMBINATION) IS CONSUMMATED.
If the Merger is effected as a "short-form" merger after expiration of the
Offer or is effected as a "long-form" merger following approval by the required
vote of stockholders of the Company, the Remaining Stockholders and stockholders
who did not vote for the Merger, respectively, may, by complying with Sections
85 through 98 of the MBCL, be entitled to appraisal and dissenters' rights as
described therein ("Dissenters' Rights"). The stockholders of record of Shares
who are eligible to, and do, exercise their Dissenters' Rights with respect to
the Merger are referred to herein as "Dissenting Stockholders," and the shares
of stock with respect to which they exercise Dissenters' Rights are referred to
herein as "Dissenting Shares." If a stockholder of the Company has a beneficial
interest in Shares that are held of record in the name of another person, and
such stockholder desires to perfect whatever Dissenters' Rights such beneficial
stockholder may have, such beneficial stockholder must act promptly to cause the
stockholder of record timely and properly to follow the steps summarized below.
Pursuant to the MBCL, a stockholder of the Company may dissent from the
proposed corporate action to approve the Merger and receive the right to an
appraisal of such stockholder's shares. A copy of Sections 85 through 98 of the
MBCL are set forth below.
If the Merger is consummated, the Dissenting Stockholders will be entitled,
if they strictly comply with the provisions of the MBCL, to have the fair value
of their shares judicially determined and paid to them. THE FOLLOWING
DISCUSSION IS NOT A COMPLETE STATEMENT OF THE MBCL RELATING TO DISSENTERS'
RIGHTS, AND IS QUALIFIED IN ITS ENTIRETY
B-1
<PAGE>
BY REFERENCE TO SECTIONS 85 THROUGH 98 OF THE MBCL SET FORTH BELOW. This
discussion and Sections 85 through 98 of the MBCL should be reviewed carefully
by any stockholder who wishes to exercise statutory Dissenters' Rights or wishes
to preserve the right to do so, since failure to comply with the required
procedures will result in the loss of such rights. A stockholder of the Company
who tenders its Shares and does not properly withdraw such Shares, or votes for
the adoption and approval of the Merger will be deemed to have waived such
stockholder's right to exercise Dissenters' Rights with respect to all Shares
held by such stockholder. Any stockholder who is considering dissenting should
consult his or her legal advisor.
To exercise Dissenters' Rights, if the Merger is not being effected as a
"short-form" merger but, rather, is being consummated following approval thereof
at a meeting of the Company's stockholders (a "long-form" merger), a stockholder
must file with the Company, before the special meeting of the stockholders of
the Company for the purpose of voting for the Merger (the "Special Meeting"), a
written objection to the Merger stating that the stockholder will exercise the
stockholder's right to dissent if the Merger is effective and giving the address
of the stockholder to which the Surviving Corporation shall mail notice in the
event that the Merger is effective, and the stockholder must not vote in favor
of the Merger. If the Merger is being effected as a "short-form" merger without
a vote or meeting of the Company's Stockholders, a stockholder must make a
written demand for appraisal of such stockholder's shares within 20 days after
the mailing of the notice that the Merger is effective. The failure to consent
to the Merger or the return of a proxy by a stockholder with instructions to
vote such stockholder's Shares covered thereby against the Merger and the Merger
(or abstaining from voting) is not sufficient to satisfy the requirement of
delivering written objection to the Company. A vote in favor of the Merger will
waive such stockholder's Dissenters' Rights. However, a stockholder's failure
to vote on the Merger will not in itself be a waiver of such stockholder's
Dissenters' Rights. A stockholder who dissents and demands Dissenters' Rights
must do so as to all Shares held by such stockholder. A stockholder may not
assert Dissenters' Rights with respect to less than all of such stockholder's
Shares.
Within 10 days after the Effective Date of the Merger, the Surviving
Corporation must give written notice that the Merger has become effective to
each Remaining Stockholder and each stockholder who gave notice before the
Special Meeting of such stockholder's objection to the Merger and who did not
vote in favor of the Merger. The giving of such notice shall not be deemed to
create any rights in such shareholder receiving such notice to demand payment
for such shares.
If the Remaining Stockholder did not vote in favor of the Merger, such
stockholder may, within 20 days after the mailing of the notice that the Merger
is effective, make written demand (the "Demand Notice") on the Surviving
Corporation for the payment of the fair value of such stockholder's Dissenting
Shares. Any stockholder failing to make demand for payment within the 20-day
period shall be bound by the Merger.
Pursuant to the MBCL, the fair value of the Dissenting Shares is the value
thereof as of the day immediately preceding the Special Meeting, exclusive of
any element of value arising from the expectation or accomplishment of the
Merger. Such determination shall be binding on all such
B-2
<PAGE>
stockholders even if the fair value so determined is less than the Merger price.
Within 30 days after the expiration of the Dissenting Stockholders' 20 day
notice period, the Surviving Corporation receiving demand for payment by the
Dissenting Stockholder must deliver to the Dissenting Stockholder payment of the
fair value of the shares.
If, within 60 days of the Effective Date of the Merger, the Dissenting
Stockholder and the Surviving Corporation do not agree as to the fair value of
the Dissenting Shares, then within 120 days after the Effective Date of the
Merger, the Dissenting Stockholder may file a petition with any court of
competent jurisdiction in Essex County, Massachusetts (the "Court") requesting a
determination of the value of such stockholder's Dissenting Shares. The
Surviving Corporation must, within 10 days after the service of the filing of a
petition described above, file with the office of the clerk of the Court in
which the petition was filed a verified list of the names and addresses of all
Dissenting Stockholders. A notice of the time and place of the hearing on the
petition will then be sent to all of the individuals on that list.
At the hearing on the petition, the Court will determine the stockholders
who have complied with the MBCL and have become entitled to Dissenters' Rights
and will appoint one or more qualified appraisers to determine the value of the
Dissenting Shares, who shall file a report with the Court. After a hearing on
the appraisal(s), the Court shall determine the fair value of the Dissenting
Shares and shall direct payment of that value by the Surviving Corporation,
together with interest thereon, beginning 91 days after the Effective Date of
the Merger, subject to receipt of duly endorsed certificates for the Dissenting
Shares. All court costs, including appraisers' fees, shall be allocated by the
Court in a manner it determines to be fair and equitable.
THERE CAN BE NO ASSURANCE THAT SUCH FAIR VALUE WILL BE EQUAL TO OR GREATER
THAN THE MERGER PRICE. IF THE FAIR VALUE OF SUCH SHARES IS DETERMINED TO BE LESS
THAN SUCH MERGER PRICE, HOLDERS OF DISSENTING SHARES WILL NOT BE ENTITLED TO
RECEIVE THE MERGER PRICE OF $10.68 PER SHARE.
Upon consummation of the Merger, each Dissenting Stockholder will cease to
have any rights of a stockholder except the right to be paid the fair value of
the Dissenting Shares and the right to receive other distributions, if any,
payable to stockholders of record prior to the Effective Date of the Merger and
any other rights under applicable Massachusetts law.
Under Massachusetts statutory law, procedures relating to dissenters'
rights are stated to be the exclusive remedy available to a stockholder
objecting to the Merger, except upon grounds that the Merger will be or is
illegal or fraudulent as to such stockholder. However, in COGGINS V. NEW ENGLAND
PATRIOTS FOOTBALL CLUB, INC., 397 Mass. 525 (1986), the Massachusetts Supreme
Judicial Court held that dissenting stockholders are not limited to the
statutory remedy of judicial appraisal in certain circumstances.
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APPRAISAL RIGHTS CANNOT BE EXERCISED AT THIS TIME. THE INFORMATION SET
FORTH ABOVE IS FOR INFORMATIONAL PURPOSES ONLY WITH RESPECT TO ALTERNATIVES
AVAILABLE TO STOCKHOLDERS IF THE MERGER (OR ANY SIMILAR BUSINESS COMBINATION) IS
CONSUMMATED.
STOCKHOLDERS WHO SELL SHARES IN THE OFFER WILL NOT BE ENTITLED TO EXERCISE
APPRAISAL RIGHTS WITH RESPECT THERETO BUT, RATHER, WILL RECEIVE THE PRICE PAID
IN THE OFFER THEREFOR.
BUSINESS CORPORATION LAW
OF THE COMMONWEALTH OF MASSACHUSETTS
SECTION 85. DISSENTING STOCKHOLDER; RIGHT TO DEMAND PAYMENT FOR STOCK;
EXCEPTION
A stockholder in any corporation organized under the laws of Massachusetts
which shall have duly voted to consolidate or merge with another corporation or
corporations under the provisions of sections seventy-eight or seventy-nine who
objects to such consolidation or merger may demand payment for his stock from
the resulting or surviving corporation and an appraisal in accordance with the
provisions of sections eighty-six to ninety-eight, inclusive, and such
stockholder and the resulting or surviving corporation shall have the rights and
duties and follow the procedure set forth in those sections. This section shall
not apply to the holders of any shares of stock of a constituent corporation
surviving a merger if, as permitted by subsection (c) of section seventy-eight,
the merger did not require for its approval a vote of the stockholders of the
surviving corporation.
SECTION 86. SECTIONS APPLICABLE TO APPRAISAL; PREREQUISITES
If a corporation proposes to take a corporate action as to which any
section of this chapter provides that a stockholder who objects to such action
shall have the right to demand payment for his shares and an appraisal thereof,
sections eighty-seven to ninety-eight, inclusive, shall apply except as
otherwise specifically provided in any section of this chapter. Except as
provided in sections eighty-two and eighty-three, no stockholder shall have such
right unless (1) he files with the corporation before the taking of the vote of
the stockholders on such corporate action, written objection to the proposed
action stating that he intends to demand payment for his shares if the action is
taken and (2) his shares are not voted in favor of the proposed action.
SECTION 87. STATEMENT OF RIGHTS OF OBJECTING STOCKHOLDERS IN NOTICE OF
MEETING; FORM
The notice of the meeting of stockholders at which the approval of such
proposed action is to be considered shall contain a statement of the rights of
objecting stockholders. The giving of such notice shall not be deemed to create
any rights in any stockholder receiving the same to demand
B-4
<PAGE>
payment for his stock, and the directors may authorize the inclusion in any such
notice of a statement of opinion by the management as to the existence or
non-existence of the right of the stockholders to demand payment for their stock
on account of the proposed corporate action. The notice may be in such form as
the directors or officers calling the meeting deem advisable, but the following
form of notice shall be sufficient to comply with this section:
"If the action proposed is approved by the stockholders at the meting
and effected by the corporation, any stockholder (1) who files with
the corporation before the taking of the vote on the approval of such
action, written objection to the proposed action stating that he
intends to demand payment for his shares if the action is taken and
(2) whose shares are not voted in favor of such action has or may have
the right to demand in writing from the corporation (or, in the case
of a consolidation or merger, the name of the resulting or surviving
corporation shall be inserted), within twenty days after the date of
mailing to him of notice in writing that the corporate action has
become effective, payment for his shares and an appraisal of the value
thereof. Such corporation and any such stockholder shall in such
cases have the rights and duties and shall follow the procedure set
forth in sections 88 to 98, inclusive, of chapter 156B of the General
Laws of Massachusetts."
SECTION 88. NOTICE OF EFFECTIVENESS OF ACTION OBJECTED TO
The corporation taking such action, or in the case of a merger or
consolidation the surviving or resulting corporation, shall, within ten days
after the date on which such corporate action became effective, notify each
stockholder who filed a written objection meeting the requirements of section
eighty-six and whose shares were not voted in favor of the approval of such
action, that the action approved at the meeting of the corporation of which he
is a stockholder has become effective. The giving of such notice shall not be
deemed to create any rights in any stockholder receiving the same to demand
payment for this stock. The notice shall be sent by registered or certified
mail, addressed to the stockholder at his last known address as it appears in
the records of the corporation.
SECTION 89. DEMAND FOR PAYMENT; TIME FOR PAYMENT
If within twenty days after the date of mailing of a notice under
subsection (e) of section eighty-two, subsection (f) of section eighty-three, or
section eighty-eight, any stockholder to whom the corporation was required to
give such notice shall demand in writing from the corporation taking such
action, or in the case of a consolidation or merger from the resulting or
surviving corporation, payment for his stock, the corporation upon which such
demand is made shall pay to him the fair value of this stock within thirty days
after the expiration of the period during which such demand may be made.
B-5
<PAGE>
SECTION 90. DEMAND FOR DETERMINATION OF VALUE; BILL IN EQUITY; VENUE
If during the period of thirty days provided for in section eighty-nine the
corporation upon which such demand is made and any such objecting stockholder
fail to agree as to the value of such stock, such corporation or any such
stockholder may within four months after the expiration of such thirty-day
period demand a determination of the value of the stock of all such objecting
stockholders by a bill in equity filed in the superior court in the county where
the corporation in which such objecting stockholder held stock had or has its
principal office in the commonwealth.
SECTION 91. PARTIES TO SUIT TO DETERMINE VALUE; SERVICE
If the bill is filed by the corporation, it shall name as parties
respondent all stockholders who have demanded payment for their shares and with
whom the corporation has not reached agreement as to the value thereof. If the
bill is filed by a stockholder, he shall bring the bill in his own behalf and in
behalf of all other stockholders who have demanded payment for their shares and
with whom the corporation has not reached agreement as to the value thereof, and
service of the bill shall be made upon the corporation by subpoena with a copy
of the bill annexed. The corporation shall file with its answer a duly verified
list of all such other stockholders, and such stockholders shall thereupon be
deemed to have been added as parties to the bill. The corporation shall give
notice in such form and returnable on such date as the court shall order to each
stockholder party to the bill by registered or certified mail, addressed to the
last known address of such stockholder as shown in the records of the
corporation, and the court may order such additional notice by publication or
otherwise as it deems advisable. Each stockholder who makes demand as provided
in section eighty-nine shall be deemed to have consented to the provisions of
this section relating to notice, and the giving of notice by the corporation to
any such stockholder in compliance with the order of the court shall be a
sufficient service of process on him. Failure to give notice to any stockholder
making demand shall not invalidate the proceedings as to other stockholders to
whom notice was properly given, and the court may at any time before the entry
of a final decree make supplementary orders of notice.
SECTION 92. DECREE DETERMINING VALUE AND ORDERING PAYMENT; VALUATION DATE
After hearing the court shall enter a decree determining the fair value of the
stock of those stockholders who have become entitled to the valuation of and
payment for their shares, and shall order the corporation to make payment of
such value, together with interest, if any, as hereinafter provided, to the
stockholders entitled thereto upon the transfer by them to the corporation of
the certificates presenting such stock if certificated or, if uncertificated,
upon receipt of an instruction transferring such stock to the corporation. For
this purpose, the value of the shares shall be determined as of the day
preceding the date of the vote approving the proposed corporate action and shall
be exclusive of any element of value arising from the expectation or
accomplishment of the proposed corporate action.
B-6
<PAGE>
SECTION 93. REFERENCE TO SPECIAL MASTER
The court in its discretion may refer the bill or any question arising
thereunder to a special master to hear the parties, make findings and report the
same to the court, all in accordance with the usual practice in suits in equity
in the superior court.
SECTION 94. NOTATION ON STOCK CERTIFICATES OF PENDENCY OF BILL
On motion the court may order stockholder parties to the bill to submit
their certificates of stock to the corporation for the notation thereon of the
pendency of the bill and may order the corporation to note such pendency in its
records with respect to any uncertificated shares held by such stockholder
parties, and may on motion dismiss the bill as to any stockholder who fails to
comply with such order.
SECTION 95. COSTS; INTEREST
The costs of the bill, including the reasonable compensation and expenses
of any master appointed by the court, but exclusive of fees of counsel or of
experts retained by any party, shall be determined by the court and taxed upon
the parties to the bill, or any of them, in such manner as appears to be
equitable, except that all costs of giving notice to stockholders as provided in
this chapter shall be paid by the corporation. Interest shall be paid upon any
award from the date of the vote approving the proposed corporate action, and the
court may on application of any interested party determine the amount of
interest to be paid in the case of any stockholder.
SECTION 96. DIVIDENDS AND VOTING RIGHTS AFTER DEMAND FOR PAYMENT
Any stockholder who has demanded payment for his stock as provided in this
chapter shall not thereafter be entitled to notice of any meeting of
stockholders or to vote such stock for any purpose and shall not be entitled to
the payment of dividends or other distribution on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the date of the vote approving the proposed corporate action) unless:
(1) A bill shall not be filed within the time provided in section
ninety;
(2) A bill, if filed, shall be dismissed as to such stockholder; or
(3) Such stockholder shall with the written approval of the
corporation, or in the case of a consolidation or merger, the
resulting or surviving corporation, deliver to it a written
withdrawal of this objections to and an acceptance of such
corporate action.
Notwithstanding the provisions of clauses (1) to (3), inclusive, said
stockholder shall have only the rights of a stockholder who did not so demand
payment for his stock as provided in this chapter.
B-7
<PAGE>
SECTION 97. STATUS OF SHARES PAID FOR
The shares of the corporation paid for by the corporation pursuant to the
provisions of this chapter shall have the status of treasury stock, or in the
case of a consolidation or merger the shares or the securities of the resulting
or surviving corporation into which the shares of such objecting stockholder
would have been converted had he not objected to such consolidation or merger
shall have the status of treasury stock or securities.
SECTION 98. EXCLUSIVE REMEDY; EXCEPTION
The enforcement by a stockholder of his right to receive payment for his
shares in the manner provided in this chapter shall be an exclusive remedy
except that this chapter shall not exclude the right of such stockholder to
bring or maintain an appropriate proceeding to obtain relief on the ground that
such corporate action will be or is illegal or fraudulent as to him.
B-8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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.
1
<PAGE>
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 ("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 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
2
<PAGE>
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
<PAGE>
<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
4
<PAGE>
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
5
<PAGE>
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.
6
<PAGE>
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 .59 .21 .45 .31
----------------------------------
</TABLE>
On February 6, 1998, the bid price of Wedgestone's shares of beneficial
interest was $ 0.35.
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.
7
<PAGE>
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
<PAGE>
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 Original Equipment ("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 existing cash to fund the balance of the $6,000,000 estimated cost
of 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.
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 13, 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 Note Receivable
Shares of Beneficial paid-in from Accumulated
Interest capital Shareholder 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
$4,144,000 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 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 4.75 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 62.4% 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. Outstanding warrants may be tendered in connection with the 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 Managing Director 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 62.4% 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. Outstanding warrants may be tendered in connection with the 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 31.0%
520 Madison Avenue, 40th Floor
New York, NY 10022
JCS Management Co., Inc. 8,492,422(1) 38.8%
520 Madison Avenue, 40th Floor
New York, NY 10022
PFG Corporation 1,713,865(2) 7.8%
235 Sunrise Boulevard
Palm Beach, FL 33480
RAB Management Corp. 1,720,699(3) 7.9%
520 Madison Avenue, 40th Floor
New York, NY 10022
JMS Holdings Co., Inc. 1,704,698(4) 7.8%
520 Madison Avenue, 40th Floor
New York, NY 10022
Charles Brady 1,300,000(5) 5.9%
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 principal shareholder of this
company. Mr. Pinto is also the president and principal shareholder of
P-wood, Inc., which 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, is 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
<PAGE>
AMENDED AND RESTATED CLAWBACK AGREEMENT
This Amended and Restated Clawback Agreement (this "Agreement") is made
effective as of April 15, 1998 by and among Wedgestone Financial, a
Massachusetts business trust, and its successors and assigns (the "Company")
and JCS Holdings Corp., PFG Corp., JMS Holdings Co. Inc., RAB Management Corp.
and their respective affiliates, which are controlled by John C. Shaw, James J.
Pinto, Richard A. Bartlett III and Gerald M. Seslowe, repectively, and Stockwood
LLC, a Minnesota limited liability company (collectively, the "Remaining
Shareholders").
WHEREAS, the Remaining Shareholders own 62.1% of the shares of beneficial
interest, $1.00 par value, of the Company;
WHEREAS, the parties hereto previously executed that certain Clawback
Agreement effective as of February 9, 1998 and now desire to amend and restate
such Agreement;
WHEREAS, the Company is making a tender offer to purchase the issued and
outstanding shares of beneficial interest, $1.00 par value (the "Offer"), held
by persons or entities other than the Remaining Shareholders (the "Public
Shareholders") at the price set forth in the Offer to Purchase, including any
amendments thereto (the "Offer Price"); and
WHEREAS, pursuant to the Offer, the Remaining Shareholders have agreed to
share with the Public Shareholders any Excess Proceeds (as defined herein), if
any, received in the future as a result of certain change in control
transactions as set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Remaining
Shareholders hereby agree as follows:
1. DEFINITIONS.
a. "Change of Control" means the occurrence of any of the following:
(i) the sale, lease, transfer, conveyance or other disposition (other than
by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company or
any successor to the Company to any "person" (as such term is used in
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended); (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company or any successor to the Company; or (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation)
the result of which is that any "person" (as defined above), other than the
Remaining Shareholders, acquires a direct or indirect interest in more than
50% of the voting power of the shares of beneficial interest of the Company
or any successor to the Company.
b. Unless otherwise defined herein, all initially capitalized terms
herein shall have
<PAGE>
the same definitions set forth in the Offer to Purchase, including any
amendments thereto, filed by the Company with the Securities and Exchange
Commission.
2. AGREEMENT REGARDING PROCEEDS UPON A CHANGE OF CONTROL. In the event a
Change of Control occurs at any time within twelve (12) months following the
later of the date of consummation of the Offer or the date of consummation of
the Merger, the parties agree that if the aggregate amount of proceeds received
by the Remaining Shareholders as a result of such Change of Control (the
"Proceeds") exceeds the product of the Offer Price multiplied by the 21,885,668
shares currently issued and outstanding (the "Total Purchase Price"), then any
positive difference between the Proceeds and the Total Purchase Price (the
"Excess Proceeds") shall be distributed by the Company as follows: the
Remaining Shareholders shall receive their proportionate share of the Excess
Proceeds (i.e. 62.1%, collectively) and the Public Shareholders other than the
Remaining Shareholders who tender their Shares pursuant to the Offer shall
receive the remaining amount of the Excess Proceeds (i.e. 37.9%, collectively)
in proportion to their ownership interests; provided, however, that in the event
that any Public Shareholder tenders only a part of his Shares pursuant to the
Offer, such Public Sharholder will share the Excess Proceeds only in the ratio
that the Shares tendered bears to the total number of Shares tendered by all
Public Shareholders.
3. PUBLIC SHAREHOLDERS AS THIRD-PARTY BENEFICIARIES. It is specifically
understood, acknowledged, and agreed among the parties hereto that each Public
Shareholder who tenders Shares pursuant to the Offer (a "Tendering Shareholder")
is and shall be a third-party beneficiary of this Agreement, and that each such
Shareholder upon tender has the vested right to enforce this Agreement
individually, as well as the vested right to cause the Company to enforce this
Agreement with respect to any sums due to the Tendering Shareholder. In the
event that any Tendering Shareholder finds it necessary to file suit to enforce
this Agreement, all of the Tendering Shareholder's expenses, including
reasonable attorneys' fees, shall be reimbursed to said Shareholder by either
the Company or the Remaining Shareholders, as the court may determine.
4. TRANSFER OF RIGHTS. This Agreement shall be binding on any heirs,
successors or permitted assigns of the parties.
5. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties and there are no other promises or conditions in any other agreement
whether oral or written. This Agreement supersedes any prior written or oral
agreements between the parties.
6. SEVERABILITY. If any provision of this Agreement shall be held to be
invalid or unenforceable for any reason, the remaining provisions shall continue
to be valid and enforceable. If a court finds that any provision of this
Agreement is invalid or unenforceable, but that by limiting such provision it
would become valid or enforceable, then such provision shall be deemed to be
written, construed, and enforced as so limited.
2
<PAGE>
7. TERM. This Agreement shall terminate twelve (12) months following the
later of the date of consummation of the Offer or the date of consummation of
the Merger.
8. APPLICABLE LAW. This Agreement shall be governed by and construed
according to the laws of the State of New York.
8. COUNTERPARTS. This Agreement may be executed in one or more
counterparts all of which taken together will constitute one and the same
instrument.
************************
WEDGESTONE FINANCIAL
By:
----------------------------------
Name:
----------------------------------
Its:
----------------------------------
JCS Holdings Corp.
- ----------------------------- By:
John C. Shaw ----------------------------------
Name:
----------------------------------
Its:
----------------------------------
PFG Corp.
- ----------------------------- By:
James J. Pinto -----------------------------------
Name:
----------------------------------
Its:
----------------------------------
JMS Holdings Co. Inc.
- ----------------------------- By:
Gerald M.. Seslowe -----------------------------------
Name:
----------------------------------
3
<PAGE>
Its:
----------------------------------
RAB Management Corp.
- ----------------------------- By:
Richard A. Bartlett III -----------------------------------
Name:
----------------------------------
Its:
----------------------------------
Stockwood LLC
By:
----------------------------------
Name:
----------------------------------
Its:
----------------------------------
4
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Schedule 13E-3 (Amendment No. 1)
and Schedule 13E-4 (amendment No. 1) of Wedgestone Financial of our report dated
February 13, 1998, appearing in the Annual Report on Form 10-K of Wedgestone
Financial for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Los Angeles, California
April 16, 1998
